Poor leadership, a lack of planning and widespread mismanagement have threatened the long-term financial health of the Central Basin Municipal Water District, which serves 2 million people in southeast Los Angeles County, according to a new state audit.
The report released Thursday by the California state auditor revealed that the district avoided competitive bidding for contracts, had six general managers in five years and spent thousands of dollars on potentially illegal gifts of public funds to support community events.
“They have had poor leadership on the board and instability at the top executive levels for many years. The role of the financial director has been unstable as well,” said Margarita Fernandez, the state auditor’s chief of public affairs. “This makes it difficult to put an effective structure in place to provide for the agency’s financial viability.”
The Central Basin Municipal Water District, which was established in 1952, serves 24 cities and six unincorporated areas throughout southeast Los Angeles County. It has a five-member board of directors elected by the public.
Auditors also found that the agency repeatedly failed to earn enough revenue to cover costs and that its board improperly set up a trust fund to pay for a project’s environmental review without adequate public meetings or safeguards to ensure that expenditures of $2.75 million from the fund were appropriate.
According the state report, the district spent $500,000 to investigate those expenditures and to deal with a lawsuit filed by a board member who sought to recover for the agency some of the money transferred to the fund.
District officials said the audit provides valuable insights and that the agency is addressing the state’s recommendations, some of which have already been implemented. The completed changes include developing a strategic plan, establishing an ethics policy and strengthening financial controls.
“We commend the state auditor for their high level of professionalism and for identifying areas where Central Basin can be a more effective agency,” Kevin Hunt, the district’s general manager, said in a prepared statement. “We also recognize that the state report identifies areas in which the district’s actions over the last five years have impacted our credibility with the public we serve.”
Despite problems uncovered by the audit, the district has maintained the same water rates for customers for the last four years, Central Basin spokesman Joseph Legaspi said. He added that the agency made up for revenue shortfalls by reducing legal and operating expenditures.
Although the audit states that district problems could increase its costs, it does not discuss any effect on water rates in the future.
Questions about the water district were first raised in 2013 when it became enmeshed in the federal investigation of State Sen. Ronald S. Calderon (D-Montebello). That year, the FBI issued several subpoenas to the agency for contracts, personnel records, purchase orders, voice mails and information related to how district officials accepted or rejected bids.
Calderon and his brother, former Assemblyman Tom Calderon, who was once an advisor to Central Basin, were later indicted on money laundering charges over alleged activities unrelated to the water district. They face a trial in federal court next year.
Prompted by news coverage about district problems, the Los Angeles County Board of Supervisors asked for a state audit last year. District officials later testified in favor of the review before the legislative audit committee, and the state inquiry began in March.
The audit found other serious financial irregularities, including failure to do long-term planning and studies to ensure that its rates were appropriate and provided enough revenue to cover costs.
“In fact, in planning its annual budgets, the district overestimated its revenues in four of the past five years and consequently its expenditures exceeded its revenues in three of those years,” the report stated.
Auditors also found that twice in the last five years, the district did not meet requirements to maintain a large enough cushion of cash to guarantee that debt payments would be covered.
The agency never defaulted. But, the report states, its credit rating was downgraded in 2013 and 2015, raising the possibility that Central Basin will have to pay higher interest on future borrowings.
In other findings, auditors stated that the district lost its liability insurance in 2014 and 2015 because the board did not comply with insurance companies’ requirements. The report notes that the agency now pays thousands of dollars more in premiums.
Auditors found that competitive bidding was not used in 13 of 20 contracts awarded from 2010 to 2015, preventing the district from getting the best value for its money. In 11 of the contracts, the agency did not justify why it failed to use competitive bidding.
The report cautioned that the district leaves itself open to allegations of favoritism and conflicts of interest. It further noted that a former general manager, Arthur J. Aguilar, was fined $30,000 by the state for attempting to steer work to a contractor that had given him almost $3,500 in gifts, an amount in excess of legal limits.
Because of disagreements on the board, the district’s leadership failed to provide stability in the hiring of general managers, a key executive position that oversees the staff and day-to-day operations, the report said. Auditors noted that from 2010 to 2015, six different people were hired as general manager and the current one is contemplating retiring in 2017.
In addition, the state found that the agency gave $9,000 in fiscal year 2012-13 to outside organizations and for years it provided $3,000 annually to each of the five board members for community outreach.
According to the report, the money might be an illegal gift of public funds because it was given to activities unrelated to agency business, such as golf tournaments, religious organizations, high school sports programs, local pageants and car shows.
Besides the $3,000 annual payment, the audit noted that board members have been receiving the same health benefits and generous car allowances as full-time district employees though they work part-time.
The audit uncovered an additional $22,000 that was misappropriated to prepay the college tuition, registration and fees for a newly hired senior manager, who did not meet the education requirements for the job.
Under district policy, tuition cannot be paid until after all coursework is finished. The report stated that the manager was among four senior executives hired in violation of agency policy and requirements.
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