San Marcos Water and PoliticsThe Price We Paid

1

October 23, 2019

Presented by:Tom Scaglione, MBA, CPA,Adjunct Accounting and Finance Faculty, CSUSM and PalomarFormer AGM / CFO, Vallecitos Water DistrictFVC Co-founder

Friendship of Vallecitos Customers

We pay for water, not politicshttps://friendshipvallecitoswater.org/

ATS Financial ServicesThe Bridge to Financial Stability

The Price We Paid

2

3

Vallecitos Water District Money Since 2013in Millions

Ratepayer Money

Beginning Balance $ 23.2

+ Water/sewer bills

- Operating expenses

- Asset replacements

Ending Balance $ 98.5

Developer Money

Beginning balance $ (3.7)

+ Cap Fee revenue

- Construction cost for growth

- Debt service

Ending Balance $(13.7)

4

5

($20,000,000)

($10,000,000)

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

VWD Developer Fund Surplus/(Deficit)

Where We’re Headed

6

Proposed Capital Facility FeesRecent Board Action

7

February• Disclosed rates to BIA and developers in private meetings - not made public until August• “I want to be competitive.” Board President, Hal MartinMay• PRA to obtain rate calculation• Contained a math error and 16-year payback to ratepayers• Letter to VWD detailed correction and revision to 5-year payback• Error & payback period never mentioned in public or correctedJune• Budget adopted – projecting $7.6 million developer fund deficit, paid for by ratepayersAugust• 1st time made public - 6 months after private meetings with BIA• 8% and 11% lowerOctober• Cap Fees adopted at 58% of the amount needed to cover developer obligations and pay

back ratepayers in 5 years.

8

“… the determined Cap Fees should have no fiscal impact to ratepayers.”

9

Development Subsidy paid by Ratepayers

10

Development Subsidy paid by Ratepayers

11

Development Subsidy paid by Ratepayers

“… the determined Cap Fees should have no fiscal impact to ratepayers.”

How do we know VWD won’t issue bonds instead of using ratepayer money to fund development?

12

No Intention to Issue Bonds

• Included $28 million in debt proceeds towards the end of

the 5-year projection with no provision for repayment

• Did not adopt reimbursement resolutions

• Intention to fully fund a $16 million 50-year debt obligation

with ratepayer money before projected bond issuance

13

No Intention to Issue Bonds

Finance Committee meeting quotes

• "We are able to do it now [borrow from ratepayers] because it's

a win win for both - ratepayers are actually getting a benefit

[interest],” Finance Manager

• “Instead of paying our ratepayers back at 2%, developers would

be paying 5%,” District Engineer

14

• “We [developers] are making

money on the ratepayers’ money,”

Mike Sannella, Board Member

More Quotes

• “I hate the word deficit for many reasons. It gives credibility

to detractors to start with. … There's no deficit. … Deficit is

a bad word. For the nay sayers, it's very easy to say 'deficit!'.

… We need to change that terminology somehow ... You

can't use the word 'deficit.' Change that terminology.”

Hal Martin, Board President

• “[How about] 'Capital Facility Revenue Shortfall’,”

General Manager

• “There you go!”

Hal Martin, Board President

15

How is the developer deficit being funded?

16

Accumulated Ratepayer Fundsin millions

17

Average Annual Rate Increase Since Board Turnover

2.6%

6.9%

0%

1%

2%

3%

4%

5%

6%

7%

Developer Fees Water/Sewer Rates

18

Accumulated Developer Fundsin millions

19

How Did We Get Here?

20

The Sewer Density Impact Fee

Assessed on developers to pay their impacts

Developers did not want to pay it

Developer-backed politicians unseated incumbents in 2012 elections

Dark money behind elections21

DARK MONEY

22

Special interest-funded organizations with politically appeasing names.

These names show up on campaign contribution disclosures – not the special interests providing the financial support.

“North County Taxpayers for Responsible Government”$30,000 to Hal Martin

“Deputy Sheriff’s Association of San Diego County PAC”$18,532 to Mike Sannella

“California Taxpayers Coalition”$10,500 to Mike Sannella

“BIA of San Diego County PAC”$20,000 to Mike Sannella

Building IndustryThousands upon thousands to Martin and Sannella

23

The Political Shift Paid for by Developers

24

At a Vallecitos Board meeting in 2013

Former Board Member Jim Poltl:

“The District’s interest has to do with providing basic services, sewer and water, at the best price. That’s all it is. It has nothing to do with helping out developers.”

Newly elected Board Member Hal Martin:

“I look at the bigger picture.Economic stimulus.

Smaller governmental agencies … make that happen.”

25

Would the economy have grown without the breaks given to developers?

Did we pay more for water to stimulate the economy?

Or did we just bolster developer profit margins?

The “Accommodation”

26

800 units X $3,183 = $2,546,400

1,000 units X $3,183 = $3,183,000

27

The “Accommodation”Political Contribution

28

Vallecitos Water District Timeline

Housing Boom

Recession

Drought

Bridge Reform Transform

Employee Benefit Cuts

Density Impact Fee

Board Turnover

The “Accommodation”

Cap Fee Due Date DeferredImpact Fee Suspended and Refunded

33% Increase in Board Pay

Board gets reelected

After a 4-year delay Board adopts Cap Fees at 58% of

the amount needed to cover developer obligations

and pay back ratepayers

Roles and Responsibilities of Electeds, Executive Management, and Ratepayers

29

How to Fix It?Part 1

Board Focus and Direction

• Revert primary focus to Ratepayers, not Developers

• Focus on long-range strategic goals – beyond the next election

30

Effective Board Members

• Ratepayers = primary focus

• Focused on long-range strategic goals of the District

• Govern with dignity

• Understand the implications of demeanor and behavior

• Recognize and respect differences of perspective and styles

• Keep confidential matters confidential

• Prepare

31

VWD Board’s Focus

32

How to Fix It?Part 2

Competent Financial Planning and Actions

• Rotate Finance Committee members every year as per policy

• Martin and Sannella have been the only member since 2014

• Adjust Capital Facility Fees to cover developer obligations

• Issue bonds to curtail the developer fund deficit

• Stop financing developer obligations with ratepayer money

• Revert Capacity Fee Due Date to Project Inception

• At least until the deficit is restored

• Adopt new Reserve Policy

• Adopt a Long-Range Financial Plan

• Main objective = ratepayer equity33

Vallecitos Water District Financial PlanTotal Reserve Balance

in Millions

$0

$10

$20

$30

$40

$50

$60

$70

$80

2019 2020 2021 2022 2023 2024

34

With a 4% Rate Increase Each Year

Issue Bonds - Objectives

• Maximize debt proceeds

• Reimbursement resolutions

• Manage finances to improve credit worthiness

• Issue now

• Restore deficit

• Pay back ratepayers

• Freeze or reduce customer rates

35

Issue Bonds - VWD’s Defiance

• Shot down efforts by former CFO to issue debt in 2017

• No reimbursement resolutions since 2017

• Expressed intention to continue to finance developer obligations

with ratepayer money at a public Finance Committee meeting

• “We’re making money on the ratepayers’ money,” Mike Sannella

• Reducing current cash position by $17 million

• to pay off a 50-year debt

• Jeopardized a favorable rating

• Reducing debt capacity36

How to Fix It?Part 3

Advocacy

• Join Friendship of Vallecitos Customers – get educated

• Attend Board meeting and express concerns

• Protest rate increases (ca December 2019)

• Nominate Vallecitos for SDCTA Golden Fleece Award

• Legally challenge rates

• Elect officials that represent your interests

37

Quote regarding suspension of the Sewer Density Impact Fee in 2016

“If it’s not being paid for by developers, it’s either

kicking the can down the road to developers in the

future, or ratepayers will pay for it.”

38

Tom Scaglione, Former Interim General Manager and CFO of Vallecitos Water District

Tom Scaglione, tomscags@gmail.com, (760) 684-1800

39

Questions?

San Marcos Water and PoliticsThe Price We Paid

Political Economy Days