WATER SUPPLY PLANNING COMMITTEE

ITEM:		DISCUSSION ITEM
7.	REVIEW OF APRIL 23, 2013 ORDINANCE NO. 152 OVERSIGHT PANEL MEETING
Meeting Date:			May 2, 2013	Budgeted:	N/A
From:			David J. Stoldt	Program/
			General Manager	Line Item No.:
Prepared By:			David J. Stoldt	Cost Estimate:
General Counsel Approval: N/A
Committee Recommendation: N/A
CEQA Compliance: N/A

SUMMARY: The Ordinance 152 Oversight Panel met on April 23, 2013. After adopting minutes of its January 2013 meeting, the following topics were discussed:

· Discussion of Legal Liability of Panel Members

· Review of Allocation of Water Supply Charge on Capital Projects, Labor, and Overhead; Discussion of 15% Overhead Limit (See Exhibits 7-A and 7-B)

· 2013-14 Preliminary Budgets for ASR, GWR, Desalination, and Other; Discussion of FY 2012-13 Carryover (See Exhibit 7-C)

· Present Concept of Funding Development of Local Water Supply Projects from Proceeds of Water Supply Charge

· Discussion of Rabobank Loan; Use of Proceeds; Repayment

The meeting concluded with a visit to the Santa Margarita Aquifer Storage and Recovery Project Site at 1910 General Jim Moore Boulevard

Discussion of Legal Liability: Panel members expressed concerns over their liability, should they make statements or recommendations that prove to be controversial or at odds with the views of someone else. General Counsel Laredo outlined that their position qualifies them as “government officials” for this purpose. Statutory immunity and qualified immunity were briefly discussed. The panel members were assured that the District has a duty to provide a defense.

Review of Allocation of Water Supply Charge on Capital Projects, Labor, and Overhead; Discussion of 15% Overhead Limit: The panel was provided a table (Exhibit 7-A, attached) designed to provide quarterly updates of revenues and expenditures on water supply activities. This is to better demonstrate the uses of the Water Supply Charge, as well as variances in receipts or expenditures compared to budget. The District showed how most expenditures for FY2012-13 have been delayed, primarily for Groundwater Replenishment. Further, it was shown how there would be insufficient revenues in FY2013-14 to meet preliminary capital budget items. The panel expressed concerns that overhead was not adequately shown and that it should include more than “Supplies & Services” and that a large component of labor should be included. The District countered that the Water Supply Charge was always intended to include the direct costs of labor engaged in water supply activities, but conceded that indirect labor costs were probably not portrayed adequately and that staff would go back and clarify.

The attached Exhibit 7-B shows a better calculation of indirect costs. The second page of Exhibit 7-B shows how the District allocates its labor to its three major budget categories. The nine (9) employee positions highlighted represent those positions that are considered whole, or in part, to be “indirect.” The other positions are considered to be all direct labor allocated to water supply activities. The first page of the exhibit then shows the calculation of the indirect labor amount, a total of $403,339. When combined with the $161,000 of Supplies & Services, the total of $564,339 represents 12.2% of the expected Water Supply Charge receipts – under the 15% limit. The percentage would likely decline as the Community Relations position is not refilled in next year’s budget and as the expected receipts increase. The percentage will rise if staff salaries increase. The consensus of the panel was that this additional analysis needs to be executed and provided, and will be discussed at the next quarterly meeting.

There was also a discussion surrounding whether debt service on the Rabobank loan is “overhead” or “capital.” The consensus of the group was that interest should be treated as a capital cost to the extent the loan was all used for a capital project. See later discussion of the Rabobank loan.

2013-14 Preliminary Budgets: The prospective budgets for water supply projects is included at the bottom of Exhibit 7-A. With respect to Groundwater Replenishment (GWR), the panel was informed of the potentially changing cost-sharing arrangement with MRWPCA, with the District’s share increasing to 75% of out-of-pocket costs beginning FY2013-14. The FY2013-14 GWR budget for the District becomes $2,850,000 versus $1,469,200 previously estimated. However, there will unexpended water supply charge income carried forward from the present fiscal year. The consensus of the panel was that GWR is a priority and a 75% share is acceptable.

Aquifer Storage and Recovery (ASR) was discussed. While the budget going forward is unchanged, it is expected that of the $1,578,827 remaining to be spent in FY2012-13 through FY 2014-15, an amount equal to approximately $1,496,101 would come from proceeds of the Rabobank loan, freeing up additional Water Supply Charge revenue for GWR and desalination.

The panel was apprised of the expenditure of Water Supply Charges on the Cal-Am desalination project for legal expenses related to the CPUC application, as well as consultant expenses related to the proposed public contribution of funds.

The panel inquired about the proposed expenditure on CEQA and permitting of an “alternative desalination project.” Several panel members expressed concern over such an expenditure and suggested that it be made less a priority than the other projects. Other panel members suggested it was a necessary safety net.

The consensus of the panel was that more detailed analysis be performed to show the availability of future Water Supply Charge revenue for all the various projects. Such an analysis is attached as Exhibit 7-C and shows that there will be sufficient moneys available for all anticipated projects over the next 3-4 years, there are timing issues related to availability. Hence, some interfund borrowing may be required if all projects move forward on the currently anticipated timeline.

Local Water Supply Projects: The local water supply initiatives of the Cities of Pacific Grove, Carmel-By-The-Sea, and Seaside were discussed with the panel. It was discussed how the local projects would likely provide some leverage in future discussions with the SWRCB in discussing changes to the CDO even if the desalination project is delayed. The panel was asked whether the District should allocate some portion of the annual Water Supply Charge to help seed such projects. It was also discussed whether such aid should be in the form of grants or loans, and whether or not the District should ask for an allocation of any water created. The consensus of the panel was that the District should make it a priority to allocate some moneys for local projects and that reimbursement from the permanent financing of such projects, if any, would be better than outright grants. The panel did not support allocating a portion of the water created to the District as a reserve.

Discussion of Rabobank Loan: The panel was given Exhibit 7-D. The uses of the loan proceeds were discussed. As shown, $2,188,625 will be used to reimburse District reserves and credit line that were used to pay capital costs. The reserves had been expected to be reimbursed by future User Fee revenues, which were curtailed by the CPUC. The remaining moneys will be used to fund future ASR Phase 1 capital costs in lieu of Water Supply Charges. Several panel members expressed reservations about use of the revenues to reimburse prior expenditures, but no consensus was put forward on the subject. It is the District’s belief that such a use is a refinancing – that is, repaying loan proceeds with new loan proceeds – all payable from the Water Supply Charge because ASR is a capital project for water supply.

EXHIBITS

7-A Second Quarter Report on Financial Activity for Water Supply

7-B Allocation of Indirect Labor, Supplies, and Services to Water Supply Charge

7-C Water Supply Charge Availability Analysis

7-D Sources and Uses of Rabobank Loan Proceeds

7-E Photo from ASR Site Visit

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