Responses to the Audit

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Central Basin Municipal Water District
California State Auditor's Comment on the Response From the Central Basin Municipal Water District

CENTRAL BASIN MUNICIPAL WATER DISTRICT

October 29, 2015

Elaine Howle, CPA
State Auditor
State of California
621 Capitol Mall
Suite 1200
Sacramento, CA 95814

Re: Response to audit report received on October 23, 2015

For 63 years, the Central Basin Municipal Water District (District) has successfully secured water supply reliability for our residents, businesses, water retailers and wholesalers and other stakeholders. It has also provided regional water policy representation at the Metropolitan Water District of Southern California, supplied both potable and recycled water, engaged our citizens through education and public information programs, and provided innovative water conservation programs. The District serves more than 2 million residents in 24 cities and unincorporated portions in Southeast Los Angeles County through 47 water retailers and one water wholesaler.

It is unfortunate that the actions of the District over the past several years generated genuine concerns of State Legislators which resulted in this audit. We recognize that the report reflects considerable effort and resource expenditures by the State. We believe that the audit, coupled with on-going efforts that the District has undertaken over the past few years, will result in improved governance and an even stronger, more responsive and transparent Central Basin.

We would like to thank the Office of the State Auditor for recognizing progress that the District has made. Specifically:

Ensuring that current staff meet qualifications
Currently meeting debt coverage
Approval and initial implementation of a three-year strategic plan
The most recent hiring process for General Manager which included: establishing an independent ad hoc committee, selection of a recruitment firm and interviewing of top candidates by Board of Directors
Acknowledgement that many of the District’s lawsuits have been resolved
Adoption of a Reserves Policy
Monthly meeting with water retailers and wholesalers to discuss Central Basin and regional water issues and receive feedback

Strengthening Administrative Code, Board and Staff Code of Conduct and Conflict of Interest policies

In addition, we are pleased to report the following recent areas of progress:

Revision of the District’s Ethics Policy to include independent review of potential ethics violations and a confidential hotline (adopted October 26, 2015)
Recognition of the District for excellence in the areas of transparency, financial reporting and information technology

Certificate for Excellence in Transparency (Special District Leadership Foundation)
Certificate of Achievement for Excellence in Financial Reporting (Government Finance Officers Association)
Excellence in Information Technology Practices Award (Municipal Information Systems Association of California)

Initiating the process to develop 10-year financial forecast (long range financial plan). (Contract awarded October 26, 2015)

The District recognizes that the audit report provides valuable insight on how we can improve our governance and performance; therefore we are committed to presenting all of the audit report’s recommendations to our Board of Directors, as listed below:

Establish a formal policy for the hiring of the General Manager by June 2016
Complete a long-term financial plan by December 2016 (in process)
Complete a water rate study no later than Spring 2017
Create a formal debt management policy immediately
Review the District’s insurance coverage annually
Disclose to the public the nature and purpose of all expenditures (implemented)
Require Brown Act and closed meeting training to the Board every two years
Limit sole source contracts to emergency or circumstances in which only one vendor can meet the District’s needs
Require written justification for not competitively bidding services
Rebid contracts if the scope of work significantly changes
Submit a quarterly report to the Board detailing contracts, contract amendments and dollar amounts
Revise policies to provide greater contract management control by June 2016
Require project management training for project managers
Execute contracts after receiving approval by General Counsel (implemented)
Update policies to prohibit engaging in verbal contracts
Report on all sole-source contracts and contracts entered under General Manager’s authority
Revise Administrative Code by 2016 to include more specific guidance as to what constitutes reasonable and necessary use of public funds
Eliminate Director’s outreach funds (immediately)
Use competitive hiring process (implemented)
Ensure that the Board formally approves of all positions for which the District recruits (implemented)
Consider for employment individuals who meet the established minimum qualifications (implemented)
Provide annual performance evaluations to all employees (implemented)
Report to the Board whether elements of its Board member compensation, including health and automobile allowance, is appropriate and reflect common practice of special districts by June 2016
Adopt a policy that general manager benefits are same as staff and negotiations will be solely based on compensation.
Adopt policy requiring Board members to report back on meetings and conferences they attend
Provide a clarifying memo and training to ensure Board members and staff are aware of proper expenses when traveling and for meal reimbursement
Revise Administrative Code to prohibit paying or reimbursing meals in the local area that involve meetings between any District representatives or District representatives and contractors by June 2016
Revise its Administrative Code to prohibit providing costs of meals for third parties

We want to express our appreciation for the professional manner in which your staff interfaced with our staff throughout the audit process. They were unfailingly polite, conscientious and committed to excellence. In the attached addendum we look at each recommendation of the Audit report and make more specific comments on the District’s approach moving forward.

We believe, however, that the recommendation that the Legislature consider enactment of special legislation may be premature and unnecessary, in light of your recommendations with suggested future time frames for completion by the District. The Central Basin Municipal Water District Board Directors are elected by the citizens of the service area. Denying 2 million citizens the right to direct representation on major water policy issues is contrary to the basic tenets of American government and should only be a last resort, if ever.

Furthermore, for decades the existing statutes have provided the sole and exclusive authority and procedure for such a change of organization (Government Code Section 56100); for the Legislature to deviate from long established processes would be an unnecessary consumption of time and attention of the Legislature when faced with many issues of statewide significance.

Sincerely,

Kevin P. Hunt, P.E.
General Manager
Central Basin Municipal Water District

Robert Apodaca
Board President
Central Basin Municipal Water District

Addendum

Chapter 1 Recommendations and District Response

Preliminarily, we understand that when an audit has been directed to cover multiple years, the resulting report is written in summary

form and fails to reflect the operational improvements over time. For example, many of the individuals who were involved in questionable circumstances described in your report are no longer with Central Basin Municipal Water District (District).

In another example, the report states that for 13 of 20 contracts reviewed, the District did not use its competitive bidding process; the statement fails to reflect

those occurred during the earlier part of the audit period and leaves the reader with the impression that the process was ignored throughout the period, without recognizing the improvements in our compliance in the latter portion of the audit period.

As the new General Manager, I solicited a number of qualified law firms to serve as General Counsel and succeeded in obtaining the services of Nossaman LLP, which has the breadth and depth of experience in not only water law but also in public agency law; and together, with our staff, have undertaken the updating of the District’s Administrative Code, Ethics Policies and procedures, and proposed training of staff and the Board of Directors.

Legislature

To ensure the efficient and effective delivery of imported and recycled water in southeastern Los Angeles County, the Legislature should pass special legislation to preserve the district as an independent entity but modify the District’s governance structure. In doing so, the Legislature should consider a governance structure that ensures the district remains accountable to those it serves, for example, by changing the District’s board from one elected by the public at large to one appointed by the District’s customers.

The Central Basin Municipal Water District has existed for 63 years, providing potable water through retailers to over 2 million residents living in 24 cities in Los Angeles County. Those residents, who pay charges to the District to partially fund its operations, directly elect the five member board of directors as provided statewide for such municipal water districts. Statutes for over 50 years have addressed uniform processes for making changes to such an organization.

The paragraph below is another reference to our comment No.3.

The current law, known as the Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000, would already be an appropriate means to effect change, if any is warranted. Local Agency Formation Commissions, existing in each county, have long been delegated the authority and responsibility to address such issues at the local level. In light of the actions which have been taken and are scheduled to be taken, the necessity of new legislation is not evident, would be duplicative and would invade the long delegated authority held by the Local Agency Formation Commission.

The paragraph below is another reference to our comment No.2.

In addition, considering the demographics of the 2 million residents in the 24 cities in Los Angeles County, disenfranchising the residents in those communities from the decades long system of directly electing the board of their respective municipal water districts would raise a number of legal issues, including those of constitutional proportions. In addition, since the number of retailers who obtain

water from the District approaches almost double in numbers the size of the staff of the District, any organization of a governing board from these retailers would almost be guaranteed to increase the size of their organization (and therefore its cost of operation) and be subject to a number of conflicts not encountered by the current system of having voters exercise their constitutional right to elect their local government officials.

District

To ensure the stability of the district operations, the district should establish a formal policy for the hiring of the General Manager position by June 2016. The Board should initiate the hiring process for a new General Manager or begin the process of renegotiating the contract with the current General Manager in the fall of 2016.

The District recognizes that a formal policy for the hiring of a General Manager position should be implemented to further ensure stability by June 2016. Moreover, the District plans to formalize its recruitment process for the General Manager prior to fall 2016.

Point 2 below is another reference to our comment No.1.

To better address potential ethical violations, the Board should adopt by June 2016 a means for investigating board members’ and staff’s potential violations of the district’s code of conduct and conflict-of-interest code that would insulate those investigations from undue influence from either the board or the General Manager.

The report accurately identifies that the District maintained an Ethics Committee. Due to concerns over the Committee’s ability to operate with complete independence, the District felt it was necessary to restructure the Committee in such a way to provide complete independence from staff and/or its Board. The District has recently adopted a new independent structure and policies to provide the tools necessary for proper oversight and notification of potential improprieties and ethical violations. This includes a confidential hotline with an independent legal firm review to validate and/or investigate any reported ethical violations and provide a structure for response, allocations of resources, and determination of required actions if any are necessary.

To evaluate its progress toward its goals and objectives, the district should use its recently adopted strategic plan and issue an annual report that describes the steps it has taken toward achieving the goals and objectives in the strategic plan.

The District adopted a new strategic plan in July 2015 and completed its first quarterly report on October 26, 2015. The District is committed to providing the highest level of transparency in all its reporting including the strategic plan; furthermore, the reporting for the strategic plan will include quarterly and annual reporting as part of its process to highlight the progress that has been made.

To ensure its long-term financial sustainability, the board should complete a long-term financial plan no later than December 2016.

The District recognizes the necessity for long term financial planning and selected a firm on October 2015, to complete a 10-year financial plan and forecast.

To ensure its water rate structure is appropriate to provide the revenues necessary to cover its legitimate costs, the district should complete its planned water rate study no later than the spring 2017.

As part of its long term financial planning the District plans to engage in a rate study. This rate study will be used to help guide evaluation of all the District’s rates and revenue sources. This has been identified in the District Strategic Plan and is scheduled to be complete before spring 2017.

To strengthen its financial stability against present and future uncertainties, the district should follow its recently adopted reserve policy.

The District intends to follow the reserves policy to ensure the financial stability and future success of the District.

To ensure that it continues to take steps to improve its financial condition and avoids additional costs due to downgrades of its debt credit ratings, the district should immediately create a formal debt management policy. This policy should clearly define its credit objectives and provide guidelines on suitable debt agreements. This policy should also require it to periodically monitor its specific financial ratios, such as its debt coverage ratio, that are relevant to its credit rating.

As part of the District’s Strategic Plan, a debt management policy is scheduled to be completed by the end of 2015. At minimum, the policy will define the credit objectives while providing guidelines on suitable debt agreements. Additionally, the policy will also address the monitoring of specific financial ratios such as debt coverage.

To maintain its current insurance coverage and better position it to negotiate for more cost-effective and appropriate coverage in the future, the board should immediately adopt a policy requiring a four-fifths majority to terminate the district’s general manager. Further the board should review the district’s insurance coverage annually and renegotiate costs and coverage amounts as necessary, particularly as the district resolves outstanding legal claims against it.

The District will discuss and deliberate the policy implementation of requiring a four-fifths majority vote to terminate the District’s general manager.

The District is committed to obtaining the lowest cost insurance possible while meeting its obligations to its customers and the public at large. The District has and will continue to annually review its coverages to ensure viability, adequacy and lowest cost possible.

Chapter 2 Recommendations and District Response

The District takes pride in its continual effort to provide the highest level of open governance and transparency by providing the communities it serves with access to its financial reports, operations, and procedures. The following section will provide information on the additional steps the District has taken and will take to further foster an open governance.

To ensure it holds itself accountable to the public, the district should follow the law and operate in an open and transparent manner by, among other things, disclosing to the public the true nature and purpose of all of its expenditures.

In recognizing this recommendation, the District remains committed to operating in an open and transparent manner. This includes disclosing all expenditures through the demands list, budget versus actual reporting, debt coverage ratio reporting, budget versus actual sales, and revenue reporting. In addition, the District conducts a semi-annual review of its budget, monthly water sales productions, and annually publishes a Comprehensive Annual Financial Report. The District also hosts a monthly meeting with water retailers and wholesalers to discuss Central Basin and regional water issues including detailed budget processes and changes.

To further operate in an open and transparent manner, the District also provides online access (via its website) to Board Agendas, financial reporting and budget related documents. Additionally, the District’s commitment to promote transparency and good governance has been recognized by the Special District Leadership Foundation with the Transparency Certificate of Excellence that was awarded to the District in September 2015. Furthermore, for the 10th consecutive year, the District received the Certificate of Achievement for Excellence in Financial Reporting (for its Comprehensive Annual Financial Report) from the Government Finance Officers Association. Both of these awards are a testament to the District’s commitment to operate in an open and transparent manner.

To ensure its board makes informed decisions on when it is proper to hold discussions and take votes in closed-session meetings, the district should require its board members to attend training – as soon as possible and biennially thereafter – specifically focused on the Brown Act and its closed meeting requirements.

The District agrees with this recommendation; in addition to the required ethics training (AB1234), the District will require Brown Act training for its Board members and staff every two years.

To make better use of the funds it spends on services, the district should amend its administrative code by June 2016 to limit its sole-source contracts to emergency circumstances and circumstances in which only one vendor can meet the district’s needs. Further, before executing any sole source contracts, the district should require written justification demonstrating the reasons for not competitively bidding the services. The justification should include the background of the purchase; a description of the vendor’s uniqueness; an explanation of the consequences of not purchasing from the vendor; market research to substantiate a lack of competition; and an analysis of pricing and alternatives.

To integrate more refined policies pertaining to sole source contracts, the District is currently revising its policy to strengthen sole sourcing language to specifically limit to emergency circumstances or occasions when the service is so critical or unique that only one vendor meets the District’s needs. The District will implement these changes no later than June 2016.

To ensure that it does not unnecessarily use amendments that limit competitive bidding for its contracts, the district should amend its administrative code by June 2016 to require that it rebid contracts if it significantly changes those contracts’ scope of work, specifically the nature of the services or work products.

The District concurs with this recommendation and is currently revising its policy to limit the use of contract amendments under the authority of the General Manager to time extensions only and will rebid any contracts that significantly change the scope of work or the nature of services or work product. The District will implement these changes prior to June 2016.

To ensure its contract amendments reflect the authorization of the board, the district should revise its administrative code to require the general manager to submit a quarterly report to the district’s board detailing all its contracts, contract amendments, and contract and amendment dollar amounts.

In recognition of this recommendation, the District will expand on its current practice of reporting on contracts entered into under the General Manager’s authority. Future reports will include all contracts and amendments disclosing dollar amounts. The District will implement these changes prior to June 2016.

To ensure it receives the best value from its contracts, the district should do the following by June 2016:

Adopt and implement a policy requiring that it include in all its contracts’ scopes of work specific, well-defined deliverables; measurable results; timelines and progress reports; and evaluations of the contractors once they complete the work.
Ensure project managers verify services were rendered before approving invoices for payment.
Create processes for project manager to organize and retain contract files that include important documents such as vendor performance and deliverable verification and acceptance.

The District agrees with this recommendation and is currently revising its procurement policy and contracting procedures to provide greater contract management controls as outlined in the Auditor’s recommendations. The District is currently in the process of adopting these revisions immediately.

To ensure its employees are able to properly administer contracts, the district should, by September 2016, follow through with its plan to require its staff responsible for project management to attend training by a reputable trainer on contract management.

To further ensure that contracts are properly administered, the District agrees with this recommendation and will provide contract management training for all project managers. This process will commence in December 2015 and will be completed by June 2016.

To minimize its risk when contracting with vendors, the district should adhere to its administrative code and execute all contracts after approval by its general counsel. Further, the district should amend its administrative code to prohibit engaging in a verbal contract. Finally, the district should continue to report to its finance committee all sole-source contracts and contracts entered under the general manager’s authority.

The District agrees with this recommendation. We are committed to the integrity of our contracting procedures. To limit potential risk, greater oversight is exercised through legal review of all contracts prior to execution. Procurement policy revisions will explicitly prohibit verbal contracts. As previously stated, the District will continue and plans to expand our practice of reporting to the Finance and Audit Committee all sole-sourced contracts and contracts entered under the General Manager’s authority. The District will implement these changes no later than June 2016.

To ensure its expenditures do not constitute a gift of public funds, the district should do the following:

Immediately eliminate its allocation of funds to individual Board Members for community outreach.

Develop policies to specify limitations on the types of activities it will sponsor in the future to ensure that it funds only those organizations whose activities have a direct link to its authorized purposes. For example, it should eliminate its purchase of holiday turkeys.

Revise the administrative code by June 2016 to include more specific guidance as to what constitutes a reasonable and necessary use of public funds. The guidance should establish restrictions on the amount spent for board member installation ceremonies. It should also include a process for the district to ensure that expenses are reasonable and necessary before it pays them.

The District agrees with these recommendation and plans to immediately eliminate its allocation of funds to individual Board Members for community outreach. The District will also refine its policies to specify limitations on sponsorship activities. Further, the District has eliminated the sponsorship for turkey donations.

Additionally, the District will revise its Administrative Code to limit and specify the types of expenditures and activities it sponsors; this will include restrictions in funding of Board Member installations. These items will be addressed in the District’s Administrative Code prior to June 2016.

Chapter 3 Recommendations and District Response

The District continues to improve its operations through the establishment and enforcement of strong policies and procedures. The following will provide additional clarification and actions taken by the District in the past few years to improve its handling of hiring, compensation of its board and employees, and appropriateness of its expenditures.

To ensure it considers the most qualified candidates for the positions, the district should follow its established hiring policies. Specifically, it should use a competitive hiring process and ensure that its board first formally approves of all positions for which the district recruits. Further, the district should only consider for employment individuals who meet the established minimum qualifications for the positions for which they have applied. If the district believes certain qualifications are not necessary for the position, it should indicate in the position description that such qualifications are desirable but not required.

The District agrees with these recommendations. By way of background and as stated in the report, the District has policies and procedures for recruitment and hiring of staff. During the five-year audit period, a total of 24 job openings were filled with a competitive recruitment process. The recruitment of the four positions that were not in compliance with district policy, occurred in 2011 and 2012.

Since 2013, the District has ensured that it follows a competitive recruitment process. Examples of the District’s compliance includes the recruitment and hiring of the former general manager and finance director in 2013, and the recent recruitment and hiring of the general manager and finance director in 2015, in addition to all other lower level positions filled since 2013.

Since 2013, the District has ensured that all candidates meet the minimum qualifications of their current positions. As noted in the report, current senior managers meet the qualifications required for their positions. In addition, the remaining non-senior manager staff also meet the minimum qualifications of their current positions.

As noted in the report, the District maintains job descriptions that detail the minimum qualifications of staff. The District will continue to maintain appropriate job descriptions to meet the operations needs of the District.

In July 2015, the Board approved recent policy that further enforces that the Board will abstain from participating in any aspect of employment and personnel matters with the exception of matters pertaining to the General Manager. The Board also approved recent policy that the Board will approve employee classifications and positions before a competitive process is commenced. Since 2013, the District has followed these policies as a matter of practice; however, additional enforcement will be provided by the development of a human resources procedures manual to ensure compliance with its recruitment and hiring policies.

To ensure that it does not inappropriately grant merit raises to its staff, the district should follow its policy to provide annual performance evaluations to all employees.

As noted in the report, the District has a policy and procedure for performance evaluations. Moving forward, the District will ensure that all performance evaluations for all staff are completed on an annual basis by the end of the fiscal year.

To ensure it is efficiently using its resources, the District should do the following:

Eliminate its board members’ automobile allowances and instead reimburse them based on mileage or transit use.

Periodically analyze and beginning in June 2016, report to the board whether all elements of its board member compensation, including health and related benefits, are appropriate and reflect the common practices of special districts.

Adopt a policy that its general managers will participate in benefits at the same level as District staff and that the board will negotiate the general managers’ contracts on the basis of salary and not other benefits such as retirement.

The District recognizes the need for improved policies to efficiently use its resources with regards to automobile allowances and compensation for the board and employment contracts for general managers. With regard to board members per diem and benefits, the District’s board policy states that board member benefits in no event shall exceed the benefit contributions of employees. The District will continue to follow state law and ensure that its benefits for directors and employees are comparable with other benefits provided by similar water districts. In early 2013, the board froze its per diem amount for four years. In addition, the district has maintained the same communication allowance of $200 since before 2006. The District plans to provide an annual analysis during the budget review period of all of the benefits provided to board members to ensure that benefits are reasonable and comparable to other benefits provided by other water districts.

As it relates to board members’ automobile allowance, the District plans to continue to build upon best practices, efficiencies, and cost savings measures already implemented. Specifically and as noted in the report, the District recently revised its policies to ensure board members demonstrate they have a valid driver’s license, automobile insurance, and an acceptable driving record as a condition for receipt of the automobile allowance and for mileage reimbursement expenses. The automobile allowance will be reviewed by the board by June 30, 2016 as part of the annual analysis of benefits for board members. Further, the District will complete a report by June 2016 or sooner on all board member benefits, including health.

With regard to staff compensation and benefits, the District plans to conduct a total compensation survey that would include salary and benefits by the end of 2016. With regard to compensation and benefits for the general manager, the District will strengthen its policies and enforce language that general managers will have the same benefits as staff and will negotiate total compensation on the basis of salary only. As noted in the report, the employment contract with the current general manager offers the same benefits as other employees.

To ensure it complies with state law and its own administrative code, the district should require board members to report back to the board on meetings and conferences they attend at the district’s expense. The district should record these reports in meeting minutes or document them in expense files before it reimburses the board members for their travel expense claims.

As it relates to requiring board members to report back to the board on meetings and conferences they attend at the District’s expense; in previous years the District has left the reporting of external meetings and conferences to individual board members. The District acknowledges the need for reporting and, moving forward, the District will provide stronger enforcement of this reporting requirement by establishing procedures including a board agenda listing of board of director’s report of meetings and conferences.

To ensure that its travel expenses are reasonable and necessary, the district should take steps, such as issuing a clarifying memorandum or providing additional training, to ensure all board members and staff, especially those who process reimbursement claims, are aware of what it considers to be proper expenses incurred while traveling, including the following:

The District agrees with these recommendations and adopted revisions, in July 2015, to Part 3 of the Administrative Code that addresses the concerns presented in the report. Prior to the recent change, in February of 2013, the District approved a resolution to revise the Administrative Code to allow for a maximum of $5,000 budget per fiscal year for each Board Director to attend conferences or seminars. Moreover, the District will continue to implement recent changes to its policies and will further develop procedures to ensure compliance of these policies specifically addressing the authorization of rental vehicles, travel expenses, lodging, and meals.

With regard to rental vehicles, as stated in the report, the District adopted a policy in July 2015 requiring that vehicles be rented only to board members or employees for eligible reimbursement. In addition, language was added to the policy with specific requirements and guidelines of the authorization and use of rental vehicles for eligible reimbursement. With regard to forms of travel other than automobile travel, the District will strengthen its procedures to ensure that travel expenses are reasonable and necessary. The District will review its current procedures in processing claims by designated staff and will provide additional training to all employees on the criteria and steps to process reimbursements. These steps will include the substantiation that air travel is of coach or equivalent class, substantiation that meeting expenses and conferences have a direct connection to the District’s mission, and substantiation that lodging expenses reflect a group or government rate. These recommendations will be completed by June 2016.

To ensure it only reimburses reasonable and necessary meal expense, the district should take steps such as issuing a clarifying memorandum or providing additional training, to ensure all board members and staff, especially those who process reimbursement claims, are familiar with its meal reimbursement limits.

The district should revise its administrative code by June 2016 to prohibit paying for reimbursing meals that occur within the local area that involve meetings either between only district representatives or between district representatives and the district’s contractors.

The district should revise its administrative code by June 2016 to prohibit providing the costs of meals to third parties.

For further refinement of its policies for meal expense reimbursements, as stated in the report, the District will revise the Administrative Code to prohibit paying or reimbursing meals in the local area that involve meetings between any District representatives or District representatives and contractors by June 2016. The District will also revise its Administrative Code to prohibit providing cost of meals for third parties.

Additionally, in relation to this report, the District recently adopted meal costs limits that are comparable to the IRS’s established rates. Staff has received training on the new meal expense reimbursement limits and will receive additional training as the policies and procedures are strengthened to include the recommendations on meal reimbursement restrictions that are recommended in this report.

Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE CENTRAL BASIN MUNICIPAL WATER DISTRICT

To provide clarity and perspective, we are commenting on the response to our audit report from the Central Basin Municipal Water District (district). The numbers below correspond to the numbers we placed in the margin of the district’s response.

During the district’s official review of our draft report in late October 2015, the board of directors (board) adopted a plan to implement a hotline for reporting potential ethics violations and to contract with a law firm to conduct an independent review of those alleged violations, which we describe here in Chapter 1. As a result of the board’s action, we added text to our recommendation here in Chapter 1 to clarify that the district should implement changes to its ethics policy by June 2016.

At the outset, it is helpful to point out that, unlike most municipal water districts in this state that directly provide water to residents, this district is a limited‑purpose agency whose primary responsibility during most of the 63 years of its history is to wholesale water from the Metropolitan Water District of Southern California (Metropolitan) to be resold to water distributors who directly provide water to residents of their respective communities. Whatever governance structure is put in place, this function remains the primary responsibility of the district. Therefore, a change in governance would not deny “2 million citizens the right to direct representation on major water policy issues” because the district’s role does not require broad policy making. Further, our recommendation to the Legislature here in Chapter 1 would not result in the loss of representation, or disenfranchisement, of the residents within the district’s jurisdiction. The district’s eligible voters currently have the power to elect the public officials of the public agencies that constitute the district’s customer base. If the Legislature implemented our recommendation, these public agencies would then have the power to appoint the board. Thus, the district’s residents would retain ultimate authority over the district’s board through representative democracy. This would be analogous to the way in which the representatives of Metropolitan and the San Diego County Water Authority are appointed, as we describe here in Chapter 1. Moreover, any subsequent governing body would continue to operate in an open and transparent manner under the Ralph M. Brown Act and would allow for public participation in the decision‑making process.

As stated in Chapter 1, because of the recent positive changes made by the district, we believe the options available under the Cortese‑Knox‑Hertzberg Local Government Reorganization Act of 2000 (Reorganization Act) are premature at this time. However, as stated here in Chapter 1, we remain skeptical of the board’s ability to consistently ensure the district’s stability and provide it with effective, ongoing leadership. Thus, the intent of our recommendation is for the Legislature to consider options, such as the one we propose, that are less extreme than those permitted under the Reorganization Act, but that create greater accountability between the district and its direct customers so that the district remains encouraged to continue the positive changes it recently made. We also note that while the Reorganization Act is locally administered, the Legislature may revise the statutes it enacted to authorize the district if it deems such revisions are necessary to meet changing conditions.

The district’s statement that our report fails to reflect the district’s operational improvements over time ignores the numerous instances in our report where we point out the district’s improvement in certain areas. For instance, we note the district’s recent progress related to addressing potential ethical violations and adopting a new strategic plan. Further, we acknowledge actions it has recently taken to address the issues we found related to the district paying for inappropriate and questionable meal expenses in Chapter 3. In addition, the district’s statement that many of the individuals who were involved in the questionable circumstances described in our report are no longer with the district overlooks the fact that the district’s policies and controls were weak or lacking in many areas throughout our audit period, regardless of the individuals involved. For instance, the district still has no formal debt management policy; its management of its contracts did not follow best practices and sometimes circumvented its own policies regarding contracts throughout our audit period, as we point out; and several of the travel and meal expense issues we identified in Tables 10 and 11, respectively, occurred within the past two fiscal years.

Our contract selection included four contracts the district entered into in each of the five fiscal years in our audit period. The district is correct that 11 of the 13 contracts we identified as sole‑source contracts in Chapter 2 were executed prior to fiscal year 2013–14. However, we describe additional contracting issues that occurred throughout our audit period in Chapter 2. For example, in Chapter 2 we describe that 19 of the 20 contracts we reviewed had scopes of work that did not include one or more of the following elements: measurable results, timelines or progress reports, or an evaluation component. Further, in Chapter 2 we recommend changes to the district’s contracting policies and processes to ensure that it not only receives the best value from its contracts, but also strengthens its control environment and ensures it has adequate contracting practices.

We do not recommend a specific structure for or size of the board. In the recommendation to the Legislature in Chapter 1, we offer the example of a board appointed by the district’s customers to better reflect the fact that the district’s customers are generally water retailers and not the residents of the district. We can envision multiple ways that can happen that may include, among other possibilities, a hybrid board of elected and appointed officials or a board of limited size elected by the retailers from a slate of individuals nominated by those retailers. Ultimately the decision of whether or how to change the governance structure resides with the Legislature.

Consistent with the audit objectives, we reviewed the qualifications of the district’s senior managers. In reviewing the qualifications of specific former managers, we identified additional concerns with the district’s hiring process, including its failure to consistently follow established policies requiring it to use a competitive hiring process, and discuss those concerns in Chapter 3. Although we note in Chapter 1 that the process the district used to hire the current general manager included interviews of top candidates, we did not review the competitiveness of the process the district used for its other current hires and therefore cannot conclude that it did or did not follow a competitive process for all individuals hired since 2013. Nevertheless, we stand by our recommendation in Chapter 3 that the district follow its hiring policies by using a competitive hiring process.