I co-founded the Ratepayer Equity Coalition (REC) to research and analyze data to quantify impacts from the policy changes at Vallecitos Water District (VWD), and find effective ways to communicate those impacts and solutions to restore ratepayer equity to Vallecitos customers. As VWD’s former Assistant General Manager and CFO, I am very familiar with the politics that led VWD away from ratepayer representation and to rate increases that could have been avoided. As a member of executive management, I was tasked with carrying out the will of the Board. Much more can be done to restore equity as an informed ratepayer activist. I pledge to do just that.
Tom Scaglione (Biography)
Why aren’t our rates equitable now?
Since 2013, Vallecitos Water District water and sewer customers have been paying for the impacts on growth from development projects. The impacts are the cost of infrastructure necessary to accommodate new customers – growth. The California Constitution says public utility customers should pay only the costs necessary to provide the water and sewer services they pay for – that does not include development to accommodate growth.
Vallecitos Water District increased customers’ water and sewer rates 6% each year on average to amass cash reserves, pay developer costs, and keep the fees paid by developers low.
What happened in 2013?
In 2012, the Vallecitos Water District Board of Directors adopted a “Sewer Density Impact Fee” requiring developers to pay for the cost of additional sewer treatment capacity resulting from so many developers building more houses than planned for. Developers did not want to pay the fee, so they put a slate of candidates together that unseated the incumbents. The very first meeting after the new developer-backed majority was seated was January 2, 2013 – and that’s when accommodations to developers started.
Public utilities, like Vallecitos, maintain a separate account, or fund, to keep track of what developers pay towards their impacts on growth and the payments from the fund for growth related capital improvement projects (bigger pipes, more treatment capacity, etc.). Naturally when the economy is good and development occurs, the fund has a positive balance, or surplus. When the economy is not so good and development slows or stops, the fund has a negative balance, or deficit.
When the developer-backed politicians gained a majority of the Vallecitos Board in 2013, an unnatural slide began in the developer fund because of the breaks the Board gave to developers. Developers are not paying for their impacts.
If developers are not paying for bigger pipes and more treatment capacity needed because of growth, who’s paying for it?
Vallecitos Water District water and sewer customers are paying for the developers’ impacts. As of June 30, 2019, Vallecitos has accumulated $97.2 million in ratepayer money. That’s more than any other water district in San Diego County. And Vallecitos is the only water district in San Diego County with a developer fund deficit. Of course they don’t have $97 million in the bank. A big chunk of that money is used to fund the deficit.
In Vallecitos’ currently adopted budget, their long-range plan is to continue to accumulate ratepayer money and accelerate the developer deficit to $44 million. [Needs edit for new budget].
As of June 30, 2018, date of the most recent financial statement audit, Vallecitos accumulated $84.4 million in ratepayers’ money – more than their neighboring water districts shown here, and more than any other water district in San Diego County. As of June 30, 2019, Vallecitos has accumulated $97.2 million in ratepayer money. A ratepayer-focused district would use this excessive accumulation to stabilize rates (pay increasing operating costs with reserves instead of raising rates), but Vallecitos’ intention is to use the money to cash finance developer obligations.
What breaks did the Vallecitos Board give to developers?
Breaks given to developers – paid for by Vallecitos Water Customers:
- Allowing a particular developer to build free of the Sewer Density Impact Fee,
- Deferring the time to pay Capital Facility Fees,
- Suspending and refunding of the Sewer Density Impact Fee,
- Delaying implementation of sufficient Capital Facility Fees, and
- Cash financing developer obligations with ratepayer money.
1. Allowing a particular developer to build free of the Sewer Density Impact Fee
The very first meeting after the newly-elected developer-backed politicians were seated, a developer came to the Board and asked for an accommodation. Two weeks later the Board met in closed session (not open to the public) and allowed that developer to build 800 to 1,000 living units free of the Sewer Density Impact Fee – an accommodation worth $2.5 to $3.2 million, and currently being paid for by water and sewer customers, not developers.
2. Deferring the time to pay Capital Facility Fees
February 5, 2014, developers asked the Board for another accommodation – defer the time to pay capital facility fees from project inception to occupancy. Vallecitos did not consider there to be a significant financial impact because it was only a timing difference. Yes, the negative impact to the developer fund balance will reverse – when the last building in San Marcos is built.
3. Suspending and refunding of the Sewer Density Impact Fee
On February 4, 2015, developers asked the Board for yet another accommodation – to eliminate the Sewer Density Impact Fee. The staff report warned that the fiscal impact would be a “loss of revenue and increased deficit …” The Board gave the developers what they wanted, suspended the fee, and refunded the fees to developers that they had collected to-date. Effectively, no developer has paid any money towards the more than $50 million of additional sewer treatment capacity needed. If the Board continues to favor developers, ratepayers will pay the costs.
4. Delaying implementation of sufficient Capital Facility Fees
Developers pay Capital Facility Fees (Cap Fees) to offset their impacts from growth. In 2015, the Board suspended and refunded the Sewer Density Impact Fee, and noted that the Master Plan will be done later the same year and the new Cap Fee will be higher to include needed sewer treatment capacity that was supposed to be paid for in the Sewer Density Impact Fee. The Cap Fees are based on the Master Plan. There is no reason why a Public Hearing to set Cap Fees can’t be done at the same meeting the Master Plan is adopted. The Master Plan was adopted four years later – four years late – on May 1, 2019. The new higher Cap Fees are still not adopted.
The 2014 Master Plan (MP) was originally scheduled for adoption on July 1, 2015. On July 15, 2015, the adoption of the MP was pushed to August 2016. On September 21, 2016, the adoption of the MP was pushed to September 2017. On November 15, 2017, the adoption of the MP was pushed to May 2018, and the name was changed from the 2014 MP to the 2017 MP. On October 17, 2018, the adoption of the MP was pushed to December 2018, and the name was changes from the 2017 MP to the 2018 MP. The MP was finally adopted May 1, 2019, fours years behind schedule, but with no Cap Fee Public Hearing that would ordinarily follow. A public hearing was schedule for June 5, 2019, but then cancelled. When asked at a February Vallecitos Finance Committee meeting when Cap Fees will be increased, the General Manager responded, “Whenever.” From January 1, 2016, the date new Cap Fees should have been adopted, through April 30, 2019, developers saved $10.7 million, and that number continues to grow the more the Board delays the much needed increase.
5. Cash financing developer obligations with ratepayer money
Vallecitos called financing developer obligations with ratepayer money a “win-win.” Ratepayers (customers) get 2% interest and developers save a potential 5% or 6% rate of interest on bonds. While 2% is the current rate Vallecitos accrues (no interest was actually paid to ratepayers), in 2013 the rate was half a percent.
Vallecitos has accumulated more ratepayer money than any other agency in San Diego County – $97 million as of June 30, 2019. Setting rates to accumulate money sufficient to maintain reserves as well as pay developer obligations is not in the best interest of the ratepayer. Using ratepayer money to pay developer obligations is not a benefit to the ratepayer. Paying developer obligations is not a cost of service. Vallecitos need to issue bonds to pay developer obligations as assumed in the Cap Fee rate model instead of using ratepayer money. Vallecitos has plenty of debt capacity.
The California Constitution states public utilities can charge customers only the cost necessary to provide the service paid for. That does not include paying for developer obligations.
Are these breaks to developers and making customers pay for it legal?
FVC cannot answer this question. An attorney cannot answer this question. Only an administrative law judge can answer this question and that’s only if these rates are challenged. Initiating a legal challenge will cost money. Since 2013, about 15% of what ratepayers have paid has gone to fund breaks to developers. In addition to funding developer breaks, Vallecitos has used ratepayer money for other purposes not benefiting ratepayers (see State of the Water Rates). However, that may not be enough to entice a homeowner to put up money to initiate a legal challenge. Also, there may be a statute of limitations preventing us from claiming refunds for those earlier years. Businesses and agricultural growers with high water use would stand to get a return on money put up to challenge rates. Even if unsuccessful, a common settlement is for the defendant to pay plaintiff’s legal costs. If you are interested in initiating a legal challenge Contact Us. FVC will work, at no cost, with attorneys who specialize in water district rate cases.