The Santa Clara Valley Water District overpays its employees,
charges too much for water, and generally mismanages its finances,
according to a biting audit that criticizes the district for not
operating in accordance with the county
’s financial practices.
The Santa Clara Valley Water District overpays its employees, charges too much for water, and generally mismanages its finances, according to a biting audit that criticizes the district for not operating in accordance with the county’s financial practices.
The review recommends that the district reallocate to an “unappropriated” reserve nearly half of an estimated $302 million it will have in the bank at the end of the fiscal year to pay for future capital improvement projects, and suggests a series of changes to “ensure greater budget integrity” and give both district directors and the Santa Clara County Board of Supervisors more control over expenditures.
“The groundwater charges are projected to increase by 48 percent in the North County and 72 percent in the South County over the next 10 years,” the county’s audit manager, Roger Mialocq, said Monday. “That’s a good reason why all the available resources in the district should be constantly evaluated and prioritized. To the extent they need more money, there’s only one place they can get it.”
The district has accepted some of the minor recommendations as being in the district’s “best interest,” but CEO Stan Williams said Monday that most of the audit’s 18 recommendations are poorly suited to the district’s operations and would effectively make the district’s board of directors redundant by giving too much authority to county supervisors. Williams said the recommendations evince the auditors’ lack of knowledge about water supply operations and the need to put money aside for projects to attract federal funding and other grants.
“This is an approach taken by somebody who is not as familiar with our business as they need to be,” Williams said. “Changing the whole structure of the way we do capital projects would make us a different type of organization doing a different type of work. The county is focused on trying to scrape by every year. Our focus is putting money away for capital projects.”
At the center of the audit is the district’s 15-year, $1.68 billion capital project budget, which the district’s board of directors uses to appropriate funding each year, even though the board has never formally approved the long-term expenditure plan or prioritized the projects.
According to the audit, the plan is too ill-defined to be a reliable source of budget information. Projects often come in substantially under budget, but rather than transfer those funds into the district’s general fund, staff often diverts the money back into its capital reserves, limiting their use.
For fiscal year 2005, which ended June 30, the district allocated $371.7 million for capital projects, but spent just $247.8 million. The remaining $123.9 million was carried over into this year’s budget as capital reserves. The 33 percent difference between the budgeted and actual expenses was the smallest discrepancy of the past four years. In fiscal year 2002, the district spent less than half of the $382.1 million it had projected for capital projects. The audit found that 17 projects scheduled for this fiscal term will finish the year with a positive balance of $48.8 million.
“The cost estimates for individual projects are not refined to reasonable accuracy before the projects are included in financing models and annual appropriations,” the audit says. “A detailed review of the budget indicated the district has funded significant projects that have not been defined, for which cost estimates have not been fully developed, and for which a clear priority and need has not been established.”
As of July 1, the district had $374.9 million in reserves. Portions of those reserves are legally restricted. For instance, income earned from water sales must be used for water delivery projects, and property tax revenue generated by Measure B’s Clean Safe Creeks program must be applied to flood control and prevention projects.
But the audit identified large sums of flexible reserves that could have been used, say, to compensate for the $51 million the district recently lost to cover the state’s budget deficit, or to lower water rates. The audit recommends that the district release $49.8 million from its watershed project reserves and $67.8 million from its capital projects reserves, the large majority of which are earmarked for North County projects. Doing so, Mialocq said, will give the district board greater authority over the budget.
“They really need to get a handle on this $1.7-billion capital improvement project budget and make sure it’s consistent with all of their priorities,” Mialocq said. “When they have done that, they can choose how to allocate their resources.”
Auditors also found the district’s 813 employees are paid an average of $128,025 in wages and benefits, or 26 percent more than the average county employee. The district’s 144 “exempt employees” earn an average of $176,960.
“We raise some questions about the level of compensation and whether or not it’s consistent with the prevailing wage in the area,” Mialocq said. “We suggest that the board of supervisors recommend an independent salary survey, so the district is not incurring costs that ultimately water users have to pay for.”
The district’s salary costs have actually gone down about $4 million from last year, and the audit notes that the higher average wage is due in part to a higher proportion of professional staff at the district. Williams noted the top 30 county employees make more than the top 30 district employees.
Auditors also charged the district with over-investing in discretionary items, such as a water rate stabilization fund and various insurance funds, and making little effort to realize maximum interest income, all decisions that drive up water rates.
The South County water rate for residential users is $215 an acre-foot. North County users are paying $420 an acre-foot. An acre-foot of water is enough to fill an area the size of a football field to a depth of one foot, or enough water to service two families for one year.
The South County rate grew 7.5 percent this year, but auditors found a number of ways the district could have actually lowered rates. By law, the district cannot earn more than it spends, so if it lowers expenditures or finds alternative sources of revenue, it must lower rates accordingly.
Mialocq said a simple transfer of the district’s reserves for health benefits for retired employees could earn an additional $3.5 million in interest, which would lower the South County rate by 3 percent, or about $6.45 an acre-foot.
“It’s nice to have a lot of extra money set aside in reserves, but the county of Santa Clara certainly can’t afford to do that,” Mialocq said. “We have adjusted reserves so they exactly match what we think our liabilities are. This is exactly the kind of thing that the supervisors and district directors should be dealing with.”
The district operates independently of the county, but its budget is subject to supervisors’ approval. The supervisors ordered the audit in October. It is the first time the district has been audited by the Harvey Rose Accountancy Corp., which has audited the county budget for more than 20 years. The results will be presented to the supervisors Aug. 9.
Matt King covers Santa Clara County for The Times. He can be reached at 847-7240 or mk***@gi************.com.
