O.C. WATER DISTRICT SCANDAL: CHARGES FILED : Many Reforms Have Changed Troubled Water District : Safeguards: The new controls are aimed at preventing abuses similar to those in the past and to protect against even the appearance of impropriety.

Long before criminal charges were contemplated against Santa Margarita Water District officials, significant change had already taken place to guard against abuse, including a strict code of conduct, a nearly total ban on gifts and a new selection process for consultants.

In addition to the new internal controls, the scandal prompted 135 people to apply for the general manager’s $113,292-a-year job, caused the elimination of the assistant general manager’s $109,116-a-year position and led to a sweep of three incumbents who had been on the board of directors when the scandal erupted.

The fourth incumbent, chairman Don B. Schone, resigned in January after it was revealed that he had accepted trips to Mexico from a firm that did business with the district.

All five board positions will be up for grabs again this year, because of a new law that has changed the district’s voting system to “one man, one vote” from the present system that assigns a vote to each dollar of a property owner’s assessed land value.

The crisis at the district also became a catalyst for change beyond its 62,000-acre domain.

In December, the Orange County Grand Jury began an inquiry into whether four water wholesalers could be merged. The grand jury is also studying whether to merge the Santa Margarita Water District with four other, similar South County districts.

The county’s Local Agency Formation Commission is conducting its own study of whether to consolidate water and sanitation services in Dana Point.

And the controversy has prompted talk of restructuring other levels of government as well, such as the county and its 31 city governments.

The Santa Margarita Water District, which operated in obscurity for 29 years, was thrust into the spotlight last spring with the news that its then-general manager, Walter W. (Bill) Knitz, and then-assistant manager, Michael P. Lord, had billed the district for tens of thousands of dollars in questionable expenses.

At the same time, consultants and vendors that won contracts worth millions of dollars treated both managers, and other district officials, to meals and gifts, almost on a weekly basis.

Meals, entertainment and gifts also were extended to board members, including former chairman Schone, who resigned the same day The Times revealed that he had accepted trips to Cabo San Lucas from an engineering firm he had approved for contracts over the years. Schone did not disclose those trips on statements of economic interest.

William B. Dye, the chief engineer, received thousands of dollars worth of meals and entertainment from engineering firms he was recommending for contracts.

Because few controls were in place to prevent Knitz and Lord from spending money the way they saw fit, both men said they saw nothing wrong with their expenditures, which included Broadway theater tickets, a limousine ride, high-priced room service tabs and frequent wax jobs for their district-provided automobiles.

Today, the rules are far different.

Every district employee is required to submit a quarterly listing of all gifts, which can include as little as a cup of coffee.

The only gift an employee can receive is a meal or beverage related to a business meeting and even then, it cannot exceed $25 per meeting. No more than $50 can come from any one source over a calendar year.

In May, the board of directors had adopted a policy of no gifts whatsoever, but eased the restrictions on meals and beverages when employees complained about not being able to accept as much as a doughnut at a morning breakfast meeting.

Those doing business with the district must submit an annual inventory of gifts provided to district employees.

For years, Knitz and Lord spent thousands of dollars on lunches and dinners, including liquor, for themselves and an assortment of consultants, land owners and staff members. Under the new district policy, the district cannot be charged for those bills and the consumption of alcohol at business meals is strictly prohibited.

The Times exposed numerous instances of district employees’ relatives working for district contractors and vice versa. For instance, Lord’s son and daughter both worked for engineering consultants that received significant district business. Under the new rules, dependent offspring of district employees cannot work for companies that do business with the Santa Margarita Water District.

However, the board recently made an exception: the employment of offspring can be allowed if the board or general manager decide it does not “create a perception of conflict.” And those offspring hired before May 19 of this year can stay in their jobs.

Limits were placed on business-trip-related meals--$10 for breakfast, $20 for lunch and $30 for dinner, including tips--and employees can no longer travel first class, as Knitz sometimes did. The district also eliminated the payment of personal expenses, such as Lord’s $200 theater tickets or Knitz’s $245 limousine ride.

No longer can an employee’s spouse’s travel be paid by the district. In Lord’s case, he brought along his wife Ingrid or an unidentified companion to business trips in New York, Oakland, San Francisco and Lake Tahoe.

The board also revamped the way in which it selects consultants and eliminated much of the work that two engineering companies--MacDonald-Stephens Engineers and Robert Bein, William Frost & Associates--had been granted for years. Both companies received no-bid work and had given tens of thousands of dollars in gifts to Santa Margarita officials.

Under the new procedures, the district must solicit competitive proposals from at least three qualified consultants for any work above $10,000. Work below $10,000 will go to a qualified consultant “on file” but should be rotated among consultants when possible.

MacDonald-Stephens and another company, Wal-Con Construction Corp., were under an internal review over money they may have overcharged the district. The district’s finance director found nearly $500,000 in questionable costs that MacDonald-Stephens billed the water authority and said that Knitz blocked his attempts to request the necessary paperwork that would have justified those charges.

Dan Miller, who filled in as general manager until a new administrator started work in January, reviewed $250,000 in questionable charges but decided in the end that the company was responsible for only $35,000 of that amount. The district did not pay for incoming invoices from the company in that amount.

Wal-Con officials said they had actually underbilled the water district for hundreds of thousands of dollars of work, and Miller concluded that the district had no legal standing against Wal-Con and could not require them to pay anything.

In both instances, Miller said, the companies say they do not have nor were they required to keep detailed records, such as labor and overtime costs.

“We don’t have much leverage, frankly,” Miller said. “We’re in a weak position.”

Even the district’s 29-year association with the law firm of Fritz R. Stradling is under review. Miller asked an outside attorney to audit Stradling’s services, which cost the district about $300,000 a year, to see how legal service is being handled.

John J. Schatz, the new general manager, requested new proposals for legal work and has said that Stradling’s law firm may be replaced with new counsel.