Many factors led the city’s water utility operating fund to dig itself into an $8-million deficit this year, but malfeasance wasn’t one of them.
That’s the conclusion—along with some recommendations to improve the financial picture—a recent audit makes. It was done at the behest of the Auditing Financing Ad Hoc Audit Committee the City Council convened to examine how the city found itself in such dire straits.
The committee and the Utilities Commission met jointly Friday to talk over the report, which is scheduled for discussion on the Jan. 3 council agenda.
“You’re not going to fix it in a year. You’re not going to fix it in two years,” said Bill Thomas, of Ralph Andersen & Associates. “This is a long-term problem because it took a long time to create the problem.”
Andersen consultant John Goss said the city’s water enterprise may face a deficit as large as $12 million next year, but some positive trends may bring it out of the red by 2014-15. Previously, city finance officer Cindy Russell has said that
The trouble probably began far before the city took over management of the Capistrano Valley Water District, which merged with the city in 2003, Goss said.
His firm’s audit only went back to 1997, but even by then the district expenses were outpacing revenues and water rates were insufficient, he said. Cash flow was dwindling.
Then, just before the city took over, the Capistrano Valley Water District took on $8.5 million in new debt just to service the debt it already had, the report states.
“I wasn’t terribly surprised by anything,” Councilman Sam Allevato said in regard to the report, except to learn how bad things were at the Capistrano Valley Water District before the city took ownership. “I didn’t realize it was in that bad of shape.”
Throughout the next seven years, the city did manage to stay in the black three times, Goss said, from 2006-08. This is despite the fact that customer payments have increased 93.7 percent while expenses have climbed 151.6 percent.
“In 2009, 2010, it essentially tanked,” Goss said. “Everything kind of came together and [you saw] really extreme losses.”
Recent troubles are the result of “a perfect storm” of circumstances, Goss said. Among them:
- Improvements needed for the groundwater treatment plant
- A decline in the economy
- Loss of subsidies from the Metropolitan Water District of Southern California
- Contamination from MTBEs and the cost to shut down wells for an extended period of time and costs to
It may appear that San Juan Capistrano residents pay more for their water, but Goss that conclusion is not necessarily correct.
“It’s hard to get an apples-to-apples comparison,” Thomas said. That’s because some cities have a separate tax on landowners’ property tax bills for water that San Juan Capistrano landowners don’t.
The report included a number of recommendations for the city to follow so that it doesn’t find itself in similar circumstances in the future. The city should:
- Update the 2009 rate study
- Share or contract with a water-rate analyst
- Shorten the time between rate studies
- The Financial Services Department should focus only on financial affairs
- Refinance some of its debt
- Re-examine the life expectancy of equipment
- Extend the expected useful life of the Groundwater Recovery Plant from 60 to 75 years
- Provide more timely reports to the Utilities Commission
Although he thought more focus should have been spent on reducing expenses rather than increasing revenues, John Perry, a long-time critic of the city’s water program and member of the ad-hoc audit committee, praised the consultants’ efforts.
“You did a great job on this report in a very short amount of time.”