O.C. WATER DISTRICT SCANDAL: CHARGES FILED : Past Grand Juries Gave Warning of Potential for Abuse at Water Districts : Scandal: The Santa Margarita affair has resulted in movement for change that could result in consolidation that would bring an end to small, independent agencies.

More than a decade ago, Orange County grand jurors saw the scandal coming.

In 1981, and again in 1987, two separate grand juries examined the independent water and sewer districts in the county and did not like what they saw. They issued two damning reports depicting a hidden layer of government run by uninformed boards of directors, reelected again and again by minuscule numbers of voters and overseeing multimillion-dollar contracts.

The jurors added a grim observation: The badly flawed system would be hard to change because of the “vested interest groups” that benefited from the public money spent annually by the districts.

In March, 1993, when scandal ultimately arrived, it landed at the biggest and most formidable water district in the South County, the Santa Margarita Water District, which stretches over Mission Viejo, Rancho Santa Margarita, Coto de Caza and the vast Rancho Mission Viejo.

Stories in The Times documented that the district’s two top managers--Walter W. (Bill) Knitz and his top assistant, Michael P. Lord--had been living lavishly using taxpayer money, and had accepted more than $60,000 in gifts over five years from companies that had been awarded district contracts worth millions of dollars--and without competitive bidding.

District officials enjoyed limousine rides, stayed in luxury hotels with four-figure room service tabs, drove $35,000 automobiles paid for and fueled by the taxpayers, traveled coast-to-coast, and piled up long lists of motel and lunch tabs in Orange County. All this happened the same year the board decided it could not afford raises for the district’s rank-and-file employees.

Ray Miller of San Juan Capistrano, who had retired in 1992 to a private consulting firm after 20 years as general manager of a smaller South County water agency--the South Coast Water District--remembers his shock at reading the accounts.

“I was really very surprised that things that far out were happening,” Miller said. “I was hoping it was an isolated case. I don’t think anybody else was as quite out in left field as they were.”

However, the discovery revealed how many small service districts do business and raised questions about spending practices of many of them. The scandal also increased scrutiny and spotlighted problems everywhere.

The news about the Santa Margarita district rippled throughout the county system of 19 independent water districts and reached north to Sacramento. It prompted talk of reform, of an end to contracts awarded without competitive bidding, and of possibly merging districts for greater efficiency.

State legislation was introduced to increase financial disclosure requirements for special districts, and to change outdated practices for the election of board members in the last two “landowner districts” in Orange County.

Before the new voting legislation became law, big landowners in the Santa Margarita and Los Alisos water districts had a greater say than resident homeowners in choosing the districts’ directors, since all property owners in those “landowner districts” were accorded one vote for each dollar of their land’s assessed value on property tax rolls.

Nowhere was the Santa Margarita scandal more intimately felt than in South County, where the myriad of water and sewer districts are a town hall system and the oldest form of government, out-dating some local cities by half a century.

In places such as Dana Point, where six different water districts and two sanitary districts divide the small, six-square-mile city, district directors were prompted to take a renewed look at obscure and antiquated practices.

And in San Clemente’s Tri-Cities Municipal Water District, for example, the controversy inspired board members to cease collecting $500 in monthly health benefits.

Also, Tri-Cities directors ended their decades-old arrangement of allowing a vice president of an engineering firm that routinely accepts $50,000 a month in public funds from Tri-Cities to act in a dual capacity as district manager.

Instead, the board hired a new general manager who is not connected with the outside engineering firm.

By July, the disclosures had revived an issue twice brought up by the county grand juries during the 1980s, but repeatedly ignored by the special districts: consolidation.

A county government agency said it was time to look at merging the small districts into larger, more accountable agencies that would bring better service to their customers.

Starting in Dana Point, the Local Agency Formation Commission, a county panel charged with overseeing annexations and consolidations of local governments, launched a study of the traditional structure of South County governments.

James Colangelo, LAFCO’s then-executive director, told a group of 28 wary officials from South County cities and special districts that “nothing is off limits. . . . If providing the best service means redrawing the boundaries of (some districts), LAFCO’s mission is to do that.”

Currently, the Orange County Grand Jury is again scrutinizing the consolidation issue. Reports from LAFCO and the jury are due in the coming months.

And the Legislature, with a bill authored by Assemblyman Mike Gotch (R-San Diego), armed LAFCO with new powers to consolidate special districts.

An interested observer in the developments of the past 12 months has been Alex Bowie, a Newport Beach attorney who has advised special districts for 30 years. The move for reform and consolidation has been in the wind for years and it was fanned by the scandal at Santa Margarita.

“You knew all of this was coming,” Bowie said. “There were two focuses in the state Legislature this (past) year. One was the tax shift, the other was the Gotch bill which meant you were going to take a real long look at local government for financial reasons.

“The spotlight just became focused because of this other unfortunate occurrence,” Bowie said.