Spigot Closing on O.C. Cities’ Water Proceeds
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Matilda Matter has dutifully paid her household’s water bill in La Palma for five years, writing checks for what she believed was actual water use. But about one-quarter of her money hasn’t gone for water at all: It went to help the city pay for services such as police protection and street sweeping.
La Palma is one of 15 Orange County cities that for years have poured millions of dollars from their municipal water agencies into their cities’ general services budgets. In the fiscal year that ends June 30, La Palma will have transferred close to $500,000 in water proceeds to the city, which represents 12% of the city’s general fund budget.
“I had no idea,” said Matter, who immigrated to La Palma from Austria with her husband. “We really don’t use so much water and the bill keeps going up.”
In two months, however, the revenue well goes dry. State voters in November passed Proposition 218, which starting July 1 requires a public vote for every increase in the cost of city services, even those previously imposed.
The target is a plethora of fees, assessments and other charges invented by governments since the passage of Proposition 13 in 1978, the landmark tax-reduction measure that limited annual increases in property taxes that cities had come to rely on to fund general services. Local governments statewide are scrambling to cover the loss of an estimated $100 million in revenue, mostly from assessments tacked on over the years to property owners’ tax bills.
Assessments aren’t the only funds targeted by the new law. After July 1, so-called city enterprise funds, such as water and sewer fees, can be transferred only for direct cost reimbursements.
General transfers “are the worst of hidden taxes” because ratepayers aren’t aware that some of their money is being used for completely different purposes, said Joel Fox, president of the Howard Jarvis Taxpayers Assn., which wrote Proposition 218.
“People don’t always put two and two together,” Fox said. “You get this image of Scrooge McDuck rubbing his hands together and sitting on top of piles of money.”
The impending deadline has launched a modern-day water war. Some cities have hired consultants; in others, city attorneys are gearing up to fight the new restrictions, arguing that enterprise funds are exempt from Proposition 218. The League of California Cities has a special attorney researching legal issues.
Some cities are resigned to the budgetary drought. Daniel E. Keen, La Palma’s city manager, said the city is preparing to cut services and dip into reserves to make up for the loss of water money.
“I really can’t give you a rationale for why we’ve been doing it because it’s been in our budget for years and years,” Keen said. “A lot of cities in Orange County have been doing it. There are some cities that say you can create a rationale to keep doing it, but we’re taking the attitude that 218 represents the will of the people and we have an obligation to proceed with that.”
Stephen Dunn, financial services manager for Buena Park, gave a simple reason for why his is the only city with its own water agency that doesn’t siphon money from it: “We never got around to it.
“I guess we’re lucky,” he said. “We’re not going to be affected by 218 at all.”
The remaining 13 cities vary over how much of their water money is transferred to general funds and the rationale for doing so. Some blend cost reimbursement with “franchise fees” or consider the transfer a replacement for property taxes that the water agency would have had to pay if it were a privately owned enterprise. Some simply transfer a fixed percent of water sales each year.
Several cities insist that all of the money transferred goes to repay costs, like the $4.7 million that Santa Ana will have transferred in water money this fiscal year.
Others, like Tustin, can’t come up with a rationale for transferring the money.
Government watchdog Berklee Maughan of Tustin first became suspicious about water fund transfers in 1991. Over the years, city officials insisted the money--from about $200,000 in fiscal year 1983-84 to $673,000 currently--was for cost reimbursement, including employee time. But when Maughan, an accountant, asked for an itemized listing, none was forthcoming.
In January, the city’s audit committee concluded that the transfers had never been based on cost reimbursement and instead on an unexplained “fee method.” A city review found no wrongdoing in the way the transfers had taken place but said the city should be “more exact” in dealing with them.
“We didn’t have a very sophisticated system in place,” Finance Director Ron Nault acknowledged.
Maughan said he believes the city, without a direct vote authorizing the transfers or an itemization of reimbursements, should repay the water agency a total of $5.7 million in transfers to the general fund since 1983 and another $1.1 million in water-fund transfers to the city’s liability fund. Councilman Jim Potts said the same in a letter to his colleagues.
“All the people of California are getting tired of the games government plays in their creative accounting to satisfy their cash-flow requirements,” Maughan said.
San Clemente is so hard hit by the loss of financial flexibility with Proposition 218 that it will ask voters June 3 to approve a 2.5% utility tax to make up a remaining $1-million loss to the general fund. The city already cut $1.8 million in services.
The water agency, sewage department and city golf course had been paying the general fund about $500,000 in charges in lieu of property taxes.
“We’ve had recessions, cutbacks and now Prop. 218; it’s been one financial crisis after another,” San Clemente Treasurer Paul Gudgeirsson said. “We knew we would have to find different sources of revenue if we were to maintain services.”
In Fullerton, director of administrative services Chris Meyer said the city’s current franchise fee on the water agency is analogous to what cable companies pay for the right to use public rights of way.
“In the case of the water fund, a number of years ago it was decided that 10% was money that the City Council would approve to the general fund, conceptually, in lieu of right of way,” Meyer said. “As to 218, to be frank, the city attorney is reviewing the issue.”
Attorney Jonathan Coupal, director of legal affairs for the Howard Jarvis Taxpayers Assn. and the principal drafter of Prop. 218, said it is likely that the group will have to file suit against one or more California cities for failing to comply with the new law’s requirement to stop general-fund transfers from water agencies unless they are strictly justified.
“Many of these transfers are admitted subsidies to the general fund and that’s not permitted,” Coupal said from Sacramento. “I know there’s a great gnashing of teeth [by cities] but I’m confident. I went through 33 drafts of this. I know it pretty well.”
Scott Morgan, in charge of finances for Orange, said the city has hired a consultant to study the entire water rate structure for compliance with the new law. The direction from the council is specific, he said: Be conservative.
“We certainly don’t want to be a test case,” he said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Floating Funds
All but one of 16 city governments in Orange County that own and operate their own water systems routinely transfer water money into general funds each year. Transfers range from 4% to 26% of gross annual water sales. Here’s a city-by-city comparison of how much was transferred this fiscal year from the water agencies:
City: 1996-97 transfer
Anaheim: City ordinance allows transfer of up to 4% of gross annual water sales to general fund. Has been 4% the last two years. Another 1.5% is transferred as a right-of-way fee ($1.5 million).
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Brea: Transfer to general fund based on cost reimbursement; was 6.4% for 1996-97 ($475,000).
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Buena Park: No water revenue goes to general fund (0).
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Fountain Valley: Fixed amount of $900,000 annually is transferred to general fund ($900,000).
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Fullerton: Fixed amount of 10% as franchise fee goes to general fund ($1.4 million).
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Garden Grove: Transfer to general fund varies based on cost reimbursement ($2.6 million).
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Huntington Beach: Fixed amount of 15% goes to general fund. Another $2.7 million was transferred in 1996-97 for “services reimbursement” ($6 million).
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La Habra: Percentage to general fund is set in annual budget as a franchise fee. Was 4% in 1996-97 ($247,610).
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La Palma: Fixed amount of 26% goes to general fund ($469,300).
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Newport Beach: Fixed amount of 7% goes to general fund ($1.3 million).
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Orange: Transfer is a portion of city’s total administrative costs, set by the ratio of water budget to total city budget. Was 6.6% for fiscal 1996-97 ($846,413).
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San Clemente: Allocation of 10% to general fund; only 4% transferred for 1996-97 ($109,220).
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Santa Ana: Percentage determined annually based on cost reimbursement ($4.7 million).
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Seal Beach: Transfer to general fund is 10% based on overhead costs ($245,000).
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Tustin: Transfer varies by year based on “fee method”; was 7.92% for 1996-97 ($673,000).
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Westminster: Transfer varies by year based on cost reimbursement; additional 5% transferred for general overhead in fiscal 1996-97 ($1.6 million).
Sources: Orange County Water Rates Survey; Orange County Water Assn. and Municipal Water District of Orange County, December 1995, December 1996; and individual cities
Researched by JEAN PASCO and JOHN POPE / For The Times
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