A Few Facts about Reserve Funds

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The group of Cambrians organized to protest the new rates for water and wastewater have been spreading word around town that the CCSD intends to take out a loan for at least $8.1 million, an amount confirmed in the CCSD’s budget. About $5 million will be put into reserves for Capital Improvements and Capital Outlay.

What’s the big deal with having a couple extra million in the CCSD’s reserve funds? We’re probably going to need it to do other projects that need to be done, so why not borrow more than we need at the moment? Interest rates are likely to go up, so let’s get while the getting is good.

Here’s the deal:

Here’s a look (from the Municipal Services Review) of the CCSD’s reserve fund over the last several years:

Here’s what the Little Hoover Commission (a California oversight commission) had to say in 2000:

The Little Hoover Commission, the common name for the Milton Marks Commission on California State Government Organization and Economy, is an independent state oversight agency that was created in 1962. It investigates state government and local operations and to promote efficiency, economy and improved service. By statute, the Commission is a balanced bipartisan board composed of five citizen members appointed by the Governor, four citizen members.

Special districts’ financial reserves have become controversial. In 2000, a report by the Little Hoover Commission revealed that special districts reported more than $19.4 billion in reserves to the State Controller in 1996-97. Enterprise special districts, which charge fees, hold most of the reserves.
This large dollar figure raised a red flag for policymakers and the public. Why were the districts setting aside so much money? And how were they planning to spend it?

In response, special district leaders argued that there are legitimate reasons for these reserves. Nearly all of the money in reserves was allocated into specific funds for given purposes. Large reserves are needed to accumulate the capital to pay for large public works projects. Reserves also provide a safety cushion in lean years, stabilizing consumers’ rates.
It became clear to taxpayers and legislators that special districts should improve the way they report their fiscal activities. Specifically, they need to explain the purpose of the reserves. Out of this controversy came a new law that now requires the largest special districts to report their reserves and fiscal information more descriptively to the State Controller’s Office, which will post the information on its web site.

Here’s what the California State Auditor has to say:

In 2003, the California State Auditor published a report entitled: “California’s Independent Water Districts:
Reserve Amounts Are Not Always Sufficiently Justified, and Some Expenses and Contract Decisions Are Questionable” (Auditors are apparently not good at concise titling, but precise is right up their alley.) The document is available for download in the AboutCambria.com Library. The 123 page report examines Special District reserves and makes some recommendations.

To demonstrate that they are using their accumulated public funds to cover reasonable and necessary expenses, water districts should ensure that they have comprehensive reserve policies in place that, at a minimum, do the following:
• Distinguish between restricted and unrestricted net assets.
• Establish distinct purposes for all reserves.
• Set target levels, such as minimums and maximums, for the accumulation of reserves.
• Identify the events or conditions that prompt the use of reserves.
• Conform with plans to acquire or build capital assets.
• Receive board approval and be in writing.
• Require periodic review of reserve balances and the rationale for maintaining them.

What do you think?

You and me and our neighbors are ultimately responsible for any debt incurred by the CCSD, whether Bonds or Taxes or other financing mechanisms. And the California State Constitution was amended to ensure that whenever a local agency enters into an agreement for debt financing, the voters have a say in it. While the CCSD could probably find a place to spend each and every penny of that “loan”, the method they are using violates the spirit, if not the letter of the California Constitution and Government Codes that limit the amount of debt an agency can incur. This is a loophole in the law that must be fixed. Unfortunately for Cambrians, there is zero chance of it being closed before they intend to bank the new funds. Also unfortunate: the message implicit in not asking the community to vote for funding through a bond: they don’t trust their neighbors and friends to approve whatever projects the money would be used for. A bond would restrict the money to whatever project it was said to be for on the ballot. There is no such restriction with this particular kind of funding.

In tight times, we should expect the General Manager, Engineers and Board of Directors to take a longer, harder look at the priorities of the District and at least give a nod of recognition to the fact that the CCSD has decided that there will not be growing number of people among which the cost can be spread. Not many of the working people will be able to afford to have such a slick and high-end District.

I’d like to see more effort to include everyone in the planning and direction-setting conversations. Not everyone has the inclination to attend Bored Board Meetings. There are a multitude of alternative ways to engage the community – most of which have never been considered here. I think it’s about time we tried some of them.

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