Introduction

Background

To help mitigate the overpumping of groundwater in southeastern Los Angeles County, the public voted to establish the Central Basin Municipal Water District (district) in 1952 under the Municipal Water District Law of 1911. The district’s founders realized they would have to curtail the region’s use of relatively inexpensive yet diminishing local groundwater by providing it with imported water. The district’s stated mission is to exercise the powers given to the district under its establishing act, utilizing them to the benefit of parties within the district and beyond. The district’s mission includes acquiring, selling, and conserving imported water and other water that meets all required standards and furnishing it to customers in a planned, timely, and cost‑effective manner that anticipates future needs.

In 1954, the district became a member agency of the Metropolitan Water District of Southern California (Metropolitan), an agency that provides the Southern California region with water that it imports from Northern California and from the Colorado River. The district purchases the imported water from Metropolitan and wholesales it to cities, mutual water companies, investor‑owned utilities, and private companies. Further, the district supplies water for groundwater replenishment and provides the region with recycled water for municipal, commercial, and industrial use. Figure 1 provides an overview of the system of water supply and delivery in Southern California.

Figure 1
Central Basin Municipal Water District’s Role in Water Delivery

Flow chart presenting an overview of the system of water supply & delivery in Southern California, and the Central Basin Municipal Water District’s role.

Sources: Documents obtained from the websites of the named entities.

* Members of the Metropolitan Water District of Southern California (Metropolitan).
^† Nonmembers of Metropolitan.

The district currently serves a population of more than two million people in 24 cities in southeast Los Angeles County and in some unincorporated areas of the county. Its mission statement indicates that it provides leadership, support, advice, and information on water issues to the people and agencies within and outside its boundaries, as appropriate. For example, the district supplies information on drought‑conservation measures to the public and provides water education courses and materials to students. According to its comprehensive annual financial report, the district’s 227‑square‑mile service area used approximately 241,000 acre‑feet of water in fiscal year 2013–14.¹ Figure 2 shows the district’s boundaries and the cities included within those boundaries.

Figure 2
Central Basin Municipal Water District’s Service Area

Figure 2, a map highlighting the Central Basin Municipal Water District’s service area, which is located in Los Angeles County, and the cities included in that area.

Source: Central Basin Municipal Water District’s website.

The District’s Governance and Administration

A five‑member board of directors (board) governs the district. Each board member represents one of five divisions within the district and is elected to a four‑year term by the voters within that division. No limits exist on the number of terms a board member may serve; according to the district’s website, the longest‑serving member of the board was in his fifth four‑year term as of September 2015. Board elections are nonpartisan and held during November general elections.² According to state law, the board is ultimately responsible for the performance of the district’s powers, privileges, and duties. Toward this end, the district’s administrative code states that the board’s responsibilities include ensuring that the district is managed well, determining its objectives and policies, approving its annual budget, and appointing its general manager. As we discuss further in Chapter 3, board members receive compensation for their service in the form of a payment for each day they attend meetings and other events on district business. They also receive medical and other health benefits equivalent to those of full‑time employees of the district.

The general manager is the chief executive of the district and is responsible to the board for the district’s administrative affairs. The general manager prepares and recommends the district’s annual budget, hires its employees, and manages its day‑to‑day operations, among other duties. As of July 2015 the district had a total of 23 authorized positions, including the general manager. Figure 3 presents the organization of the district.

Figure 3
Central Basin Municipal Water District Organizational Chart

Figure 3, an organizational chart of the Central Basin Municipal Water District.

Source: Central Basin Municipal Water District’s website.

For more than 15 years the district shared administration with a companion organization, the West Basin Municipal Water District (West Basin). West Basin performs similar functions to the district but for communities in southwest Los Angeles County. Between 1990 and 2006 the two districts shared staff and an office building. However, in 2006 West Basin took action to end the partnership. West Basin purchased the office building, and the district relocated its headquarters to the City of Commerce, California.

District Revenue

The district’s primary source of operating revenue is the sale of imported water and, to a lesser degree, recycled water. Figure 4 shows the distribution of district revenue by source during fiscal year 2014–15. Its revenue from the sale of imported water was about $45 million, or 81 percent of its total revenues, in fiscal year 2014–15, while its sales of recycled water accounted for about $4 million, or 7 percent of its total revenues, in the same period.

Figure 4
Central Basin Municipal Water District’s Revenue Sources by Major Category
For Fiscal Year 2014–15

Figure 4, a pie chart that presents the distribution of the Central Basin Municipal Water District’s revenue by major category during fiscal year 2014-15.

Source: Central Basin Municipal Water District’s (district) fiscal year 2014–15 draft financial statements as of October 2015.

* The district derives other revenues from deliveries of treated water, investment income, and other miscellaneous sources.
^† Standby charges are imposed by the district on landowners and used by the district to help pay its debt service costs on its water recycling facilities and the purchase of its headquarters building.

The district’s other significant source of revenue is standby charges that the district imposes on landowners with the annual approval of its board. Los Angeles County includes the charge on each property owner’s property tax bill. The standby charge’s purpose is to minimize the effects of the drought on the area through the construction of recycled water distribution systems that could provide an alternative source of water. The district currently uses revenue from the standby charges to pay debt service on the debt it issued to finance the construction of its water recycling facilities, as well as to pay for the acquisition of its headquarters building. The district’s standby charges accounted for about $3 million, or 6 percent of its total revenues, in fiscal year 2014–15.

Recent Scrutiny of the District

The district and its board have come under scrutiny in recent years. News reports have alleged that the district misused public funds, including that it established a legal trust fund in a manner that violated state open meeting law, that it inappropriately reimbursed meal expenses, and that it engaged in inappropriate contracting practices and employment practices. We address these allegations in this report. In addition, the district has been involved in a number of lawsuits over the past several years. Although many of these lawsuits have been settled or dismissed, a small number related to the district’s employment practices are still pending.

In October 2014 the County of Los Angeles Department of Public Works published a report on the district that sought to ensure it addressed its ongoing problems so that it could continue to provide water and service to its customers. The report recommended an independent management audit of the district’s operations and included a discussion of the process necessary to dissolve the district and transfer its functions to another entity. We discuss this report further in Chapter 1.

Scope and Methodology

The Joint Legislative Audit Committee (audit committee) directed the California State Auditor’s office to perform an audit of various aspects of the district’s operations, including its contracting, expenditures, strategic planning, financial viability, and human resources. Table 1 includes the audit objectives the audit committee approved and the methods we used to address them.

Table 1
Audit Objectives and the Methods Used to Address Them
	Audit Objective	Method
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	We reviewed relevant state laws and regulations.

2	Assess whether the Central Basin Municipal Water District (district) has appropriate policies, processes, and oversight for various aspects of its operations. Specifically, perform the following covering the five‑year period from 2010 to 2015: a. Assess whether the district’s board of directors (board) has sufficient policies and practices to guide its spending decisions. In addition, determine whether the board exercises sufficient oversight regarding expenditures.	For our audit period of July 1, 2010, through June 30, 2015: We interviewed relevant district staff and reviewed documentation related to the district’s process for setting its annual budget and the board’s process for approving the budget. We reviewed the district’s administrative code and accounting policies. We reviewed minutes and agendas for meetings of the district’s board, which included the consent calendar items from its finance committee. We reviewed expenditure lists the district provided to the board and the public, which we discuss further in Table 2 on page 19.
	b. Assess whether the district has sufficient processes and controls to ensure expenditures and other financial activities are appropriate.	We interviewed relevant district staff and reviewed documentation related to the district’s process for approving expenditures. We determined whether the district had and followed a debt management policy.
	c. Review the district’s contracting procedures and determine whether they are consistent with applicable contracting requirements and with procedures used by other municipal water districts. From a selection of contracts, determine whether the district complied with the applicable laws, policies, and regulations.	We judgmentally selected 20 contracts active primarily during our audit period and determined the extent to which the district followed legal requirements and its own policies and practices for contracting. We ensured that we reviewed contracts for a variety of different services, including engineering and construction services, legal services, lobbying services, and public affairs services, as well as contracts that had received significant media attention. We judgmentally selected and reviewed five contracts the district entered into before our audit period that were still active during our audit period. We selected these contracts based on their amendment histories and on the media attention they received. We identified best practices for contract management using the Project Management Institute’s Project Management Body of Knowledge, the State Contracting Manual, and contracting policies from other water agencies, including the Western Municipal Water District and the Municipal Water District of Orange County, as well as the San Diego County Water Authority.
	d. Assess whether the district has adequate resources and policies to address personnel matters, including the conduct of its board members.	We determined that the district maintained codes of conduct for both its staff and its board throughout the audit period. We reviewed district policies and interviewed relevant staff regarding how the district investigates violations of its policies and codes of conduct. We reviewed district records and noted that board members and senior managers attended ethics and sexual harassment training as required. We ensured board members and relevant staff filed required conflict‑of‑interest forms. We reviewed those forms to determine whether the individuals reported significant relationships that conflicted with board decisions. We had no findings in this area; however, we note the results of an investigation by the Fair Political Practices Commission in Chapter 2.
	e. Assess whether the district operates transparently, including complying with laws governing public meetings, public records, and fee‑setting, and whether it publicly reports on all its spending.	We interviewed relevant staff regarding the district’s compliance with state open meeting laws and training on such laws for board members. We reviewed the district’s tracking of its compliance with state requirements regarding advanced posting of meeting agendas. According to the director of administration and board services, the district did not have any process for tracking its compliance with posting requirements until March 2013; however, our review of its tracking process subsequent to that date found no reportable concerns. We reviewed a selection of eight public records act requests. We identified instances in which the district did not clearly indicate it had fully addressed requests and another in which the district missed a deadline by several days. Although in our judgment these issues do not rise to the level of reportable findings because the district still responded to the requests, we discussed ways to improve the district’s process with its staff. We reviewed minutes of board meetings and determined the board conducted public meetings before considering changes to its fees. We noted that the district includes lists of expenditures in its monthly board agendas, which are publicly available on the district’s website.

3	Assess whether the district’s expenditures and revenues are reasonable. Specifically, perform the following covering the five‑year period from 2010 to 2015: a. To the extent possible, assess the reasons for any trends in revenues generated through customer rates during the past five years.	We reviewed the district’s comprehensive annual financial reports for the fiscal years 2010–11 through 2013–14 and its draft fiscal year 2014–15 financial statements as of October 2015 to determine the reasons for increases or decreases in revenues generated through customer rates. We analyzed reasons for large changes in the district’s revenues generated through customer rates.
	b. For major categories of expenditures, assess the reasons for any major trends, including those expenditure trends related to legal matters and those not directly related to the district’s primary mission.	We analyzed reasons for large changes in district expenditures, including its legal services expenditures. We interviewed relevant district staff and reviewed the district’s audited financial statements to determine the reasons for increases or decreases in major expenditure categories.
	c. For a sample of expenditures, determine whether they were legally allowable, reasonable, and consistent with the mission of the agency.	We reviewed the district’s administrative code, prior external audit findings, and other policy documents. We interviewed relevant staff regarding the district’s internal controls over expenditures. We judgmentally selected 50 expenditures from the audit period and tested them for compliance with applicable laws, policies, and best practices. We selected 35 expenditures for testing from the district’s file room and 15 expenditures from the public expenditure lists created from its accounting system. We found that the public expenditure lists were incomplete because they did not include certain transfers the district made to a legal trust fund, which we describe further in Chapter 2.

4	To the extent the district has a strategic plan, determine the following: a. Whether the strategic plan contains goals and objectives that support the mission of the organization. b. How often the district evaluates its success in achieving its goals and objectives, and updates the strategic plan to reflect changes, including changes in regulatory requirements, goals, and milestones.	We reviewed the district’s strategic plans the board considered in October 2010 and May 2015 and determined they contained key elements of strategic plans and reflected the district’s mission. However, as we describe in Chapter 1, the board did not approve or ensure the district appropriately implemented its October 2010 strategic plan. We interviewed relevant staff regarding the development and implementation of the district’s strategic plans, including the district’s plans for periodic review. We reviewed proposed metrics for both the 2010 and 2015 plans. Because the district did not adequately implement its 2010 plan, we reviewed its planned approach to evaluating its current strategic plan and determined it is reasonable.

5	Assess whether the district has qualified staff to manage its operations. Specifically, perform the following: a. To the extent possible, determine whether technical staff has sufficient qualifications and resources to adequately maintain its infrastructure over the long term.	We interviewed the district’s director of human resources and engineering staff. We obtained and reviewed position descriptions for the district’s engineering staff and its general manager. We compared the position descriptions to the staff’s qualifications. We reviewed the district’s contract for operations and maintenance of its recycled water pipeline. We determined that the district recently hired additional technical staff and that its current staff are qualified. We have no reportable findings in this area.
	b. To the extent possible, assess the qualifications and sufficiency of the district’s management staff responsible for essential operations.	We interviewed the district’s director of human resources. We reviewed the district’s organizational chart and human resources files to compare position descriptions to stated qualifications for a selection of current district managers. We determined the selected current managers were qualified and that the district had sufficient staff for its essential operations. We interviewed the district’s current general manager regarding his tenure and the board’s plans for hiring general managers in the future.
	c. Identify the total compensation of each member of the board of directors and top managers.	We interviewed the director of human resources. We reviewed district policies regarding compensation, expenditure reports, and payroll data to determine board member compensation. To identify the amounts board members received for per diem and allowances, such as the automobile or transportation allowance, we relied on monthly reports of expenditures the district generated from its accounting systems and presented to the board. We noted that board members generally receive health and other benefits to the same extent that staff do, and we describe these benefits in Chapter 3. We reviewed data the district reported to the California State Controller’s Office (State Controller) regarding the compensation of its top managers. We compared the salaries of selected district managers to the State Controller’s data to ensure the district accurately reported its compensation to the State Controller.
	d. Determine whether the total compensation received by each of the district’s top managers is comparable to that received by top managers in similar public agencies or municipal water districts in the region.	We selected four additional water agencies in Southern California. We reviewed data the district and the four additional water agencies reported to the State Controller regarding the compensation for selected management positions. We reviewed the district’s surveys of certain water agencies’ compensation and benefits.

6	Assess the district’s financial viability and control environment. Specifically, for the five‑year period from 2010 to 2015, determine the following: a. Whether the district retained a qualified, independent auditor for its annual financial audits and whether completed audits were publicly available.	We reviewed the district’s contracts with its auditors for fiscal years 2010–11 through 2014–15. We reviewed licensing records for the district’s auditors. The district contracted with three different audit firms between fiscal years 2010–11 and 2014–15. We noted the firms were licensed and had no complaints on file. We reviewed the district’s website and determined the district made its annual financial audits publicly available.
	b. What deficiencies were reported by its independent auditor and how the district has addressed such deficiencies.	We reviewed the district’s independent auditors’ reports for fiscal years 2010–11 through 2013–14. We noted that the district received an unqualified opinion on its financial statements every year for fiscal years 2010–11 through 2013–14. The district’s external auditor had not issued an opinion on the district’s fiscal year 2014–15 financial statements as of October 2015. We noted that the district adequately addressed all deficiencies its independent auditors reported except for the following: The district does not have a debt management policy. We discuss this further in Chapter 1. The district did not have meal expense limits in place until July 2015. We discuss this further in Chapter 3.
	c. How often the district changed auditors and the reasons for changing auditors.	We reviewed the district’s contracts with its auditors for fiscal years 2010–11 through 2014–15. The district contracted with three audit firms, changing auditors twice during our audit period. In the first instance, according to board memoranda, the district selected a different firm than the one that had been its auditor for the previous 10 years. In the second, a board memorandum stated that the firm told the district it could not complete its contract. We had no reportable findings in this area.
	d. The district’s debt ratio coverage for bond commitments and the reasons for any year in which the ratio fell below the generally accepted level.	We interviewed relevant staff and reviewed documentation related to the district’s debt coverage ratio. We also examined the reasons why the debt coverage ratio fell below the accepted level. We interviewed relevant staff and reviewed documentation to determine how the district’s inability to meet its required debt coverage ratio affected its credit rating and debt costs.
	e. To the extent possible, assess whether the five‑year trends in revenues and expenditures indicate long‑term financial viability.	We analyzed the information we gathered for Objectives 3a, 3b, and 6d, as well as pertinent information contained in the district’s audited financial statements and other records, to determine the extent to which this information indicates the district’s long‑term financial viability. We determined whether the district had and used a long‑term financial plan. We describe our findings in this area in Chapter 1.

7	Review and assess any other issues that are significant to the district’s operations and management.	We interviewed relevant staff and reviewed documentation related to the district’s attempts to obtain and retain insurance coverage for its operations. We reviewed state law and interviewed staff at the Los Angeles County Local Area Formation Commission to determine the process through which the district’s governance may change or the district may dissolve. We interviewed the five current members of the board to obtain their perspectives on the district’s operations and its challenges over the last five years. While we did not directly quote any of the board members’ interviews in our report, we used their comments to help inform our audit fieldwork.

Sources: The California State Auditor’s analysis of Joint Legislative Audit Committee audit request 2015‑102 and information and documentation identified in the table column titled Method.

Assessment of Data Reliability

In performing this audit, we relied upon reports generated from the information systems listed in Table 2. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that is used to support our findings, conclusions, or recommendations. Table 2 shows the results of this analysis.

Table 2
Methods Used to Assess Data Reliability
Information System	Purpose	Method and Result	Conclusion
Central Basin Municipal Water District’s (district): – New Logos Database data, for the period July 2012 through June 2015 – Master Accounting Series 90 data, for the period July 2010 through June 2012	To make a judgmental selection of expenditures	• This purpose did not require a data reliability assessment. Instead, we needed to gain assurance that the population of expenditures was complete for our review purposes. • We obtained reasonable assurance by comparing total disbursements presented on the expenditure lists to the district’s monthly bank reconciliations or payment register reports.	As part of our audit work, we identified certain transactions not present on the district’s expenditure lists. Nevertheless, we noted that these lists materially agreed with monthly bank reconciliations or payment register reports, and were thus adequate to use for selecting expenditures for review.
	To calculate per diem payments the district made to its board members	To determine accuracy, we judgmentally selected 50 board‑approved per diem payments from the district’s records and compared them to claim forms detailing the meetings board members attended. To determine completeness, we reviewed district records and noted directors generally received per diem payments in each pay period between July 2010 and June 2015.	Sufficiently reliable for the purposes of this audit.
The district’s: – New Logos Database data, for the period July 2012 through June 2015 – Access Database data, for the period July 2010 through June 2012	To make a judgmental selection of contracts	This purpose did not require a data reliability assessment. Instead, we needed to gain assurance that the population of contracts was complete for our review purposes. To determine completeness, we haphazardly selected 39 contracts from the district’s files and ensured they were present in either the New Logos or Access database, as appropriate.	Complete for the purposes of this audit.

Sources: California State Auditor’s analysis of various documents, interviews, and data obtained from the district.

Footnotes

¹ An acre‑foot of water is approximately 326,000 gallons, which the district states is enough to meet the water needs of two average families in and around their homes for one year. Go back to text

² In 2012 the district received approval from Los Angeles County to change its election to June for that year only. Go back to text