White Paper on the Administrative Campus

Our first white paper, Rate Increases & Capital Improvements, presented an overview discussing how the proposed rate increase was determined that heavily relied on the significance of particular capital improvement priorities first documented in the Capital Improvement Program, 2010 (CIP).  In particular, the CIP properly frames the priority context for the "administrative campus" by incorrectly classifying it as a "category A" administrative project placed among thirteen infrastructure projects.  We have heard valid arguments from the District decrying the dismal state of our badly neglected infrastructure; these projects are easily justified.  But here we find an administrative project anomalously bundled among those having the highest and most urgent priority.  The argument for it relies on the fact that if it's included with other urgent projects, that it too must be equally urgent.  This is the implicit line of reasoning expressed by the District, where simply stated as a hypothetical syllogism: "All projects in category A are urgent. The campus is a category A project, therefore the campus is urgent".  This self-justifying argument of course is specious.  Why?  Because the other infrastructure projects all have compelling valid reasons for being there, but this administrative project lacks any such equivalent justification.  And the District has been unable to provide them beyond appealing variously to efficiency, safety and convenience articulated in the form of slick sound-bite quality advertisements or moving fatherly homilies, like Director Jim Rapoza's at the last board meeting on 10.2.2013.

These are not arguments, they're sales pitches.  After spending over $3.5 million dollars since 2005 on real estate, permits, landscape and architectural design, they now want ratepayers to agree to foot the bill for the projected additional $6 million needed to finish it by selling us the campus.  Selling relies chiefly on the art of persuasion, where creating belief in something is more important than knowing something.  Belief is largely a subjective affair and can vary from person to person, while knowledge by its very definition must be objective.  No one really challenges the objective basis for infrastructure justifications, like the appeal to leaking pipes, tanks and our "72 year old" infrastructure badly needing maintenance; we don't believe these are problems; we know they are.  We are being asked to believe in the campus project without an adequate objective basis.

One has to wonder how $3.5 million somehow got diverted away from valid category A infrastructure projects into a dubious administrative project that has to-date yielded no tangible physical results - yet.  Oh, but that will take another $6 million (and, as you will shortly see much more than this).  Now this seems odd.  Imagine how much of our infrastructure could have been repaired and properly maintained with this wasted money.  Please look at the estimated price-tags in the CIP (in 2010 estimated prices) when you consider this question, and carefully read the articulate well-written letter on behalf of the Sunnycroft neighborhood (reviewed at last Thursday's board meeting) requesting the District begin paying attention to fire safety and emergency preparedness issues regarding inadequate and negligently maintained fire hydrants.

The significance of Proposition 218

Proposition 218, The Right to Vote on Taxes Act, was passed in 1996 following Proposition 13 (1978) and Proposition 62 (1984) and amended California’s Constitution by adding Articles XIIIC and XIIID.  The League of California Cities “Proposition 218, Implementation Guide, 2007 ed.”, describes it as the “most recent attempt to constrain the authority of cities, counties, and special districts to raise revenue by requiring compliance with mandatory procedural and substantive requirements.” (underlining added).  The San Lorenzo Valley Water District, formed in 1941 as a public governmental agency, is classified as a “special district”, and therefore is subject to the procedures and substance of Prop. 218.  If you are like most ratepayers, your knowledge is probably limited to only the most publicly visible procedure requiring a majority protest to defeat a rate increase.  But the substantive requirements are equally significant, because they carefully set legal standards that proposed projects must meet to qualify for funding under any fee or rate increase.   

Proposition 218 broadly distinguishes between two types of taxes, assessments and fees, each having their own applicable procedures and substantive requirements.  Don’t’ confuse the two.  Article XIIID sec. 4 applies only to assessments.  These are charges for local public improvements benefiting the property being charged.  This would include such things as street improvements or sewer connections.  Assessments are subject to ballot and voting procedures that do not apply to fees.  Article XIIID sec. 4 applies only to assessments.

Fees or charges, on the other hand, are covered in Article XIIID sec 6.  These are levied as a consequence of specifically adding a “property-related service”, like water to real property.  The public agency recovers the cost of providing the service (in our case water delivery) to the public by virtue of a property owner deciding to have a connection and enjoy its benefits.  Sec. 6 also specifically mandates that only a majority protest procedure be followed for the approval of fees related to sewer, water and refuse collection services where silence is consent. 

For brevity, we have extracted from the 2007 User Guide, the following section dealing only with “Property-Related Fees and Charges” (pgs 49 and 50) that summarizes in human-readable form what Prop. 218 states about fees, charges and rate increases (underlined or italics added):

We would also add to this summary Article XIIID.6(4):

“(4) No fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question.  Fees or charges based on potential or future use of a service are not permitted. …”

How do we tie the financing of the campus to a service that is actually used by, or immediately available to, the owner of “the property in question”?  The logical connection is tenuous.  The facilities they now have do not affect the service we now receive, and it won’t be any different after sinking another $6 million into a better facility.  Apparently life is hard for them, but the argument that operations will be better by becoming more efficient is far too vague.  It might be possible to build such an argument, but the District has failed to do so.  Building a better facility is not a service.  We are being asked to accept that it affects our water service significantly enough to justify it under Prop. 218.  But exactly how it affects that service needs an economic justification they simply have not provided, and it appears they are not going to be able to provide. 

In the SLVWD’s press release dated, 9.9.2013, the reasons given for the campus are as follows:

  • The present facilities are aging, dangerous and inadequate.

They certainly are, but then why did the District spend over half a million on restoration costs in 2009-2010 at the same time the Administrative Campus was being designed?  And, according to our analysis of the District’s disbursement records, the same architectural firm was retained for both projects.  Fixing this is not a service-related cost.

  • “Provide a 24-hour fueling station that could be utilized by fire and police for emergencies.

Bullet number three above states that Prop. 218 cannot be used to fund governmental services that are already generally available.  Have the fire and police departments raised any flags about not having access to fuel during emergencies?  I think they probably already have this one well covered.  Saying that it could be so used is equivocal; they probably know this one won’t fly but it makes it look better by having it.  Moreover, a 24-hour fueling station could be built elsewhere as a far less expensive project that isn’t on sensitive wetlands.

  • “Provide a much needed community meeting room in Boulder Creek.”

Really?  A water rate increase is going to pay for this?  Where has it been said this is “much needed”?  This is a general governmental service already available to the public at large in “substantially the same manner as they are to property owners.” The SLVWD delivers water not meeting rooms.

  • Improve the District’s environmental sustainability, including GhG emissions reductions by reducing frequency vehicle trips.

This is an appealing claim, but it has no economic justification and doesn’t have a justifying service-related cost benefit.  What would an estimate of green house gases be otherwise?  How many “trips” are currently being made and what are the distances they must travel?  According to the Campus IS/MND 2010 a 250kW diesel generator is in the plan and will be installed on the wetland site.  If they were consistent with their stated concerns over GhG emissions, shouldn’t this use a cleaner, less polluting fuel?  They could have invested in electric vehicles and show us they’re really green.

  • “Provide a safe environment for the public and SLVWD employees.”

Although desirable, this is not a service-related cost.  Besides, why didn’t they address this in 2009 – 2010 when the current administration facilities were allegedly renovated?   The implication here is they’ve been too poor to properly attend to this until now.  Common sense and decency dictates that this should have been an ongoing priority all along.  Was it?  If so, how, and if not why not?

  • Maintain equipment, parts and records in a single location. 

To make this fly, the District must convince us with an economically compelling argument.  This weakly stated purpose also touches on their emergency preparedness argument.  Yet, a valid emergency preparedness plan would distribute the assets.  Having one’s eggs all in the same basket isn’t necessarily a good idea.  The advantages of consolidation during normal operation can be transformed into positive detriments during a real emergency when distributed resource allocation is far more prudent.  The only conduit in and out of the Campus wetland area is by Highway 9, and it most likely will be closed or intermittently so, making needed access to centralized resources difficult or impossible. 

How the campus will actually be paid for

Recall that in our first white paper that Table ES-1, from the 2013 rate study, shows how the revenue from the rate increase will progressively increase yearly until at the end it will total $9.12 million.  The campus will cost over $6 million, so they won’t actually have this amount of revenue until FY17 when revenues are projected to be $6.18 million.  However, the District has a different, non-revenue solution to pay for the campus.  Look at Table 3-2, “Capital Project Expenditures and Source of Funds”, from the Final 2013 Water and Wastewater Charges Study below.

It clearly shows the District plans to borrow $6,000,000 in FY15 and finance it over 20 years. The hidden costs of borrowing rather than using revenues directly consists of two parts.  First, money spent just underwriting the loan, includes fees for legal and administration costs that are required to issue debt.  This amounts to an Issuance Cost and Reserve of $360,000, or 6% of $6 million.  The second part is the additional interest per year compounded over 20 years.  Therefore, using $6,000,000 as the real principal amount, as shown in the table, will result in 40 payments of $232,495 = $9,299,780 or about $9.30 million total with a calculated yearly compounded interest rate of 3.0%. (using $6,360,000 from the Table only changes the calculated interest rate to 3.8%, but not the $9.30 million total).  The hidden cost of this strategy is $3.3 million more in cost that we didn’t know about beyond $6 million.  Would you, the ratepayer, liked to have known about this plan ahead of time?  Would it affect your judgement about whether the campus should be funded or not?  Is this prudent?  Is this so urgent that we have to waste another $3.3 million dollars on finance charges for an already dubious project?  The District will tell us that it’s always been there in the rate study, all we have to do is look it up.  They will claim that they are not required to explain anything further.  Observe that this is yet another example of how the District pays lip service to being “completely open and transparent” with the community.  They should have told us that it’s really $9.3 million since they intend to completely finance the basic $6 million.  Moreover, recall that Proposition 218 states that: “Revenues derived from the fee may not be used for any purpose other than that for which the fee was imposed”.  The rate increase stipulates $6 million for the campus, not $6 million plus $3.3 million in hidden non-disclosed costs.  So how do you think they intend to pay the debt service on this loan?  With fees collected from the ratepayers of course. 

Our findings of the total cost of the Campus, beginning with the acquisition of land in 2004 - 2005 is summarized in the following table.  The figures spent to date are taken from our ongoing financial analysis of the District's public disbursement records.

Adding the spending as of September 2013, to the total financing payback after 20 years results in over $12.8 million dollars.  Some of us may not live long enough to see that debt paid off and this is not even considering the $4 million they plan to borrow to finance the required matching funds for the Intertie system.  Doesn't this seem like an awful lot of money to you?  Should we have to mortgage the future to pay it? 

Summary and Retrospective

This is obviously poor fiscal planning and governance.  And how has it gotten to be this bad?  Because we in the community are all guilty of “being asleep at the switch”.  This Board has enjoyed no oversight from the public simply because, for a long time, no one was interested enough in getting involved.  Ratepayer Bruce Holloway told us that before the Watchdogs got involved well over a year ago, when we became concerned about the Proposition 50 Intertie project, that the norm was for him to be the sole community representative attending board meetings and special committee meetings.  Many of you are outraged over the massive 65% proposed rate increase, but frankly fellow community members, we have allowed it to happen.  Most of us have been content to simply use the property-related service of having good water at a reasonably decent price.  We have imputed a level of competency and civic responsibility to the SLVWD board and staff that is not warranted.  The SLVWD  now has a public relations disaster on their hands that won’t be corrected with “healing dialogs” and more public meetings, as Director Bruce puts it.  The stance of the Board’s majority remains solidly opposed to any substantive community oversight.  Calling them on specific issues in this rate increase is like listing at windmills.   They simply accept our protesting as the norm for 'rate-increase-belly-aching.'  They expect that after October 24th, all will settle down and we will go away.  They can then return to status quo.

Nonsense.  We are not going away and we’re not going to let things go along as they always have.  We intend to continue investigating by using the Freedom of Information Act to gain access to financial and operational details that might help explain how things have gotten into the state they are now in.  And we will diligently report our findings to the community.  We all deserve better than this.  We may no longer have to "haul water out of the creek with buckets" as one proponent put it, but for this privilege of having a water connection, we might as well be hauling money in buckets instead.

At this juncture, a rate increase under Prop. 218 is not the way to fund an expensive, unjustifiable administrative project that is more appropriate for a Borland or Apple or Google campus. Prop. 218 defines a standard of specificity and applicability for capital projects that the administrative campus fails to meet.  If the Campus project is really so necessary, they should make their case to the voters by putting it on the ballot as a bond issue.   We can all listen to their sale pitches for the Campus within that legal structure and leave the infrastructure projects to a justified rate increase process under Prop. 218.