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$8-Million Budget Hole Won't Close Overnight

San Juan Capistrano's water department will eventually come back to the black, an auditor concludes, adding that the current crisis is the result of a "perfect storm."

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
  • Weather
  • Conservation
  • 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.”

Clint Worthington December 19, 2011 at 08:18 PM
What a great quote by Sam Allevato in Patch "I wasn’t terribly surprised by anything". I guess Sam missed the part that as of October 31st, 2011 the Utility Department has over a 12 million dollar deficit. That is 60% of our City's annual budget. Why did it take a special audit for it to come out that the City is 12 million in the red? Why was the City Council not transparent in this. This should not have been a surpise to the public. Laura Freese and Sam Allevato voted and heavily backed Joe Tait at $324,000 a year and look what it got us. The report also showed that the City had 7.1 million in expenses related to Chevron, but only collected 3.1 million from Chevron. That is only paid if the the Ground Water Recovery Plant performs. Good negotiating there Sam and Laura. Sixty percent of the City's budget lost in less than a year.
JessC December 20, 2011 at 06:36 AM
"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." Great, so because the City did not do its due diligence before the merger, taxpayers are now stuck with a lemon. Sam, if I am not mistaken, you have been on the council for eight years. Two of the eight years you were Mayor, and you did not realize how bad it was! Now, that is really a very frightening comment. God help us all. As upset as I am with Laura Freese for her support of Joe Tait, I will have to say that I am glad that she inititate this audit idea. It never would have happened otherwise. To the Ad Hoc committee: Great job!
William Brighton December 20, 2011 at 06:59 PM
I'm so glad to see this. Knowing Joe Tait for some time, its great to see what he told us residents finally be made public. These problems started back in 2004 and escalated and was exposed when the previous city manager was let go by the previous council. The plant should have never been built the way it was, never financed on our backs, never acquired the bankrupt water district without us being told, never allowed previous and current financial management to stick it to us for so many years without us being told the truth. As a resident for nearly 40 years, I'm glad Tait told us what was and had been done to us. The council didnt listen to Merkal, Perry, Riordan, Miller and anyone else who wanted answers. We are now paying $400k for the two who took Tait's place so there's another 100 grand down the rat hole. I thank Allevato, Nielsen and Freese for hiring Tait, ending all the no-win lawsuits and fixing for Tait the brown water being delivered to my house under previous management. Also, check your water rates to come. More cost for past sins from 2004 - 2009. If I recall, Tait came on board in late 2009 so the damage was done. He and now Karen Brust inherited the sins of their fathers and mother.
Sam Allevato December 20, 2011 at 07:34 PM
JessC, sorry you can't read and comprehend. I was not on the council in 1997 and obviously was not involved in the acquistion of the water district at that time. I didn't know that it was taken over "at that time" in such bad shape, and until this audit, which I also supported being commissioned and served on, this information was not publicly known.
Sam Allevato December 20, 2011 at 07:52 PM
Mr. Worthington, again spinning the results of a report for your own purposes (campaign 2012?) This City Council was transparent in commissioning this audit committee, which I served on, to get the real facts of why this utility was in the red! Other than not being on the council in 1997 and privy to the condition of the utility when it was taken over by the City back then, the other factors causing this deficit shouldn't have surprised you if you had been paying attention. Rates not raised for years, a groundwater plant that was not designed properly (again before I was on council), unforseen repairs to the plant (designed before I was on council), MTBe contamination caused by Chervron, which we dealt with without going to a long drawn out lawsuit, and closing down the main well losing Metropolitan subsidies, these were the causes of the deficit, not mismanagement by staff or the City Council and now verified by the auditors! Joe Tait told the public about all of these issues and worked to correct them. The Plant is now delivering 77% of our drinking water and continues to improve. It was a perfect storm of causes and we, as a council, had the guts to confront them, correct them, and tell the public all the details accurately and in an unvarnished manner. I am proud of the work of this audit committee and each of its members. We can now move in a positive manner, not trying to play the blame game, but actually delivering clean drinking water to our residents.
Clint Worthington December 21, 2011 at 07:32 AM
(Page 1) Mr. Allevato, these facts came from the audit report. You, as Mayor have not been transparent in any of this. Mr. Allevato as Mayor of our City you never disclosed in any Mayors Message, City Council Meeting, Utility Committee meeting or any other pubilic meeting or media that the City Utility Department was over 12 million in the red. It took the Utility Department en masse to literally demand an audit of the water department from the City Council. In addition, it took residents to demand an audit. All the while you kept fighting the audit because you did not want a "forensic audit". Why Mr. Allevato did it take an outside auditor to inform the taxpayers that over 60% of the City's budget has been lost in less than a year? Why did you not tell us Mr. Allevato? As for taking over a failing utility, maybe you need to do a little more research on that before you make that statement. Similar to the Redevelopment Agency, the City Council served as the Board of Directors and the City Manager served as the General Manager of the Capistano Valley Water District. Mr. Allevato, the City has had a hand in the CVWD all along. In fact two years before the City officially took over the CVWD had over 2 million in cash. When the City took over, it was down to 13,000. Keep in mind it was the City Council running the CVWD. Look at the records. I have.
Clint Worthington December 21, 2011 at 07:34 AM
(Page 2) As for rates. I have paid attention. You have done nothing but raise rates time after time and still lose money. The CCF is the highest paid in South County. Mr. Allevato. You were on the City Council when the Ground Water Recovery Plant opened in 2004. If it was not designed properly, the City had insurance on the bonds that were sold and all it had to do was to put in a claim to the insurance company that the GWRP was not working as designed and the bonds would have been paid off. Did you do that Mr. Allevato. No you did not and you were one the City Council then. I am glad that you brought up the MTBE contamination. Had the City done it's due diligence they would have found out about the contamination by Chevron. Chevron had filed all of the documents necessary with the Orange County Health Care Agency. Isn't that why the City did not sue Chevron because the City had failed to complete any type of investigation of surrounding areas to see if the Dance Hall and Paseo Tirador well would be feasible. The Audit report clearly states the City had 7.1 million in expenses and only recovered at the max 3.1 million from Chevron. It is obvious the City did not want to sue because it did not have a case against Chevron. It was the City's own ineptness in failing to due it's due diligence before it started drilling wells. Can't you please just tell us the facts Mr. Allevato?
Clint Worthington December 21, 2011 at 07:38 AM
Mr. Allevato, how could you have know it was not in bad shape. You lost earlier 8.2 million dollars earlier this year. You had to spend another million dollars just within the past 60 days because the City had no emergency generators for electricity in case the electricity went out. It took your entire time on the City Council Mr. Allevato to figure that one out that when the electricity goes out, the plant cannot pump water. And you wonder why we lost 12 million dollars.
Clint Worthington December 21, 2011 at 07:53 AM
With all due respect Mr. Brighton, in my opinion, Joe Tait was not a friend of our City. At $324,000 a year MSNB reported that he was one of the top 15 highest paid government employees in the nation. He almost made as much as the President of the United States. Mr. Tait was not any President. The previous City Manager Dave Adams, was not let go by the City Council, he left for the City of Yorba Linda. Let's talk about Joe Tait's record of accomplishments. Have you ever seen the staff reorganization that he spent more than a year working on? Never completed. I could go on, but he is would not serve a purpose as he is no longer with the City.

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