Push Mounts for Reform of Water Districts : Management: Critics cite desire to consolidate some of the 19 independent agencies. Others, while agreeing greater accountability is needed, say bigger is not necessarily better.

First came the scandal. Now, comes talk of reform.

The disclosures of possible criminal activity within the Santa Margarita Water District, the biggest water agency in South County, have so outraged the public that one agency director complained he is now button-holed about the subject on weekends at the beach.

There is no question, local officials say, that Santa Margarita has pointed to a need for greater accountability in a county system of 19 independent water districts that operate as anonymous governments, subject to little public scrutiny.

Yet, the same officials are wary of dismantling a town hall system that, as a whole, provides local residents with their most crucial resource for less than a penny a gallon.

Before the stampede begins to consolidate water districts or roll them into existing, more visible governments like cities, opponents are sending up vocal warnings: “The best-run agencies are the smallest ones,” said Neil M. Cline, a director of the Coastal Municipal Water District.

“Which is more efficient, the federal government? The county or state agency? . . . I don’t believe that making something bigger makes it better,” Cline said.

Although in its infancy, the reform movement for change is growing rapidly on many fronts.

* In Sacramento, legislation has been introduced to combat excessive spending by district officials in a bill that would increase disclosure requirements for special districts throughout the state. Another bill would eliminate outdated district voting rights.

* An independent county review has been launched to make recommendations for consolidation of the complex water district system in Dana Point and the City Council is expected to take up the issue Tuesday. After Dana Point, officials say county review could extend countywide.

* A director of one of the county’s largest water wholesalers has proposed merging the giant Municipal Water District of Orange County with two other local wholesalers.

All actions, with the exception of the county review, have been sparked by reports first disclosed in The Times of the Santa Margarita district’s two top executives’ excessive spending and gift-taking from firms that have been granted lucrative contracts with the district.

The FBI and Orange County district attorney’s office are conducting a joint investigation into possible violations of conflict-of-interest laws by Walter W. (Bill) Knitz, the recently suspended general manager, and his deputy, Michael P. Lord, who also was suspended.

Ingrid McGuire, director of a South County water district serving parts of Laguna Beach and Dana Point, said the focus of any reform movement should be on the consumer, not on the bureaucratic workings of largely anonymous agencies.

“We have just recently seen that there are pitfalls with creating a large agency” such as Santa Margarita, said McGuire of the South Coast Water District. “That means a lot of power is concentrated in one general manager and one board of directors.”

The other extreme, McGuire cautioned, is the anachronism that exists in south Orange County today: too many small independent districts with little or no coordination.

“I think there is a happy middle ground,” she said. “That is the job of the Local Agency Formation Commission, to find a happy middle ground.”

McGuire, a former Dana Point City Council member, said the public should be brought into the process through a series of open hearings to see how the system could be restructured.

“Ultimately, it is their money and this should be their decision,” McGuire said.

Others say LAFCO is not a likely instrument of change, calling it a toothless and highly political agency whose primary job has been to oversee the growth of new governmental agencies, including water districts and cities.

Largely unknown itself, LAFCO is made up of two county supervisors, two city council members and one member selected from the public. With four of its five members politically tied to various geographic areas, one water official said, the membership often cannot leave their loyalties at the door.

“Are there special districts that should be consolidated? I’m sure there are,” said Peer A. Swan, president of the Irvine Ranch Water District board. “Periodically, it’s healthy to look at them. But it should be done with some deliberate thought, not in some political arena such as LAFCO. It should be done by a group looking at economies of scale, cost reduction and lowering the cost of government.”

Lloyd Woerner, director of the Dana Point Sanitary District, said LAFCO has further complicated the problem by approving city boundaries in recent years without regard to previously established water and other special district boundaries.

“They are the ones responsible for the patchwork of special districts in Dana Point,” Woerner said, adding that some district boundaries date back to the late 1920s.

Even the LAFCO director, James Colangelo, admits that his agency has long been hamstrung by a foible of state law that allows the commission to grant approval to new government agencies only, with no accompanying tools to initiate dissolution when bodies outlive their usefulness.

As a result, the commission is backing new legislation that would give the agency power to merge or eliminate unneeded special districts.

Anaheim is one of a string of cities in Orange County that manages its own water services, and officials there say they wouldn’t have it any other way.

Ed Alario, Anaheim’s assistant general manager of water services, said city oversight in essence provides residents with a one-stop service inside the more familiar workings of a City Hall.

“The smaller agencies tend to have very little interplay with the public,” Alario said. “More people come to the council meetings. Cities seem to be much tighter-fisted financially and are able to keep closer track of things.”

Consolidation of governments and the revenue reaped from municipal water operations can more than make up for what is lost in expertise, Alario said.

According to the Anaheim city charter, 4% of all its utility revenue must be transferred each year to the city’s general fund treasury. The share from water sales amounts to $1 million annually and helps fund other city services.

But city control has its risks too. District officials say that independent water agencies devote expertise to a single mission, without having to “worry about the homeless, about welfare, about whether to cut library funds, and don’t have to negotiate with the firemen’s union,” said Susan M. Trager, a Laguna Beach attorney who specializes in water issues.

Single mission or no, water districts should not be regarded as identical agencies, said Ronald E. Kennedy, general manager of the El Toro Water District, a 32-year-old agency that extends to Mission Viejo, Lake Forest, Laguna Hills and Leisure World. Water officials around the county have been hurt by the scandal in Santa Margarita because people tend to generalize and lump the districts together, Kennedy said.

“There is a huge temptation to generalize everything and tar everyone with the same brush, but it’s necessary to look at each district on its own,” Kennedy said.

Each district has its own unique circumstances including its age, debts, location and ambitions for growth, Kennedy said.

The El Toro Water District, for example, sits in a part of the county that is nearly built out and, by virtue of its age, the consumers in the district are close to paying off the pipelines, pump stations and treatment plants, all critical to its operations.

“El Toro is nearly debt-free, but that has come only over 25 years,” Kennedy said. “We have a couple of bond issues that will be completely retired in the next two or three years. In the younger districts (like Santa Margarita), that’s not the case.”

According to a rate survey conducted by the Municipal Water District of Orange County, a family in El Toro may pay as much as $13 less than customers in one of Santa Margarita’s four water improvement districts.

To lump El Toro in with a younger, growing, debt-ridden agency would not be fair, he added.

“The question you have to ask in each case is, ‘Will reform add value to the process?’ ” Kennedy said. “The only person who can answer that is the ratepayer.”

Perhaps never before has so much attention been paid to such obscure agencies. Not even two county grand juries could muster enough support for their recommendations on wholesale consolidation for water agencies.

“Those (grand jury) reports were bound up and put on a shelf to sit,” said John Killefer, a director with the giant Metropolitan Water District of Southern California, which imports water from Northern California and Arizona for distribution in the Southland.

Another advocate for greater citizen participation with the districts, Killefer of Newport Beach, said the resulting furor from the Santa Margarita case will be “cleansing” for the industry.

“It’s up to the electorate,” Killefer said. “It would be good for people to go out and look at the headquarters of some of these districts. It is awesome. Obviously, there could be savings.

“But I believe in local control,” he said. “The people within these local districts and on these boards will trigger a cleansing. It is needed.”