Rancho Santa Fe Water District board to consider pros and cons of neighboring agency merger at workshop


By Joe Tash

Along with the steep rise in the water bills of San Diego County residents over the past few years has come more talk about water agency consolidation.

While some say water district mergers can generate millions of dollars in savings through reduction of administrative overhead costs, others say they can also erode local control over precious water resources such as pipes, treatment plants and reservoirs.

The Santa Fe Irrigation District, which provides water to residents of Rancho Santa Fe, Fairbanks Ranch and Solana Beach, is no exception, either to increased rates or talk of consolidation. The district’s board of directors will discuss the pros and cons of merging with a neighboring agency at a workshop meeting, set for 8:30 a.m. on Sept. 12 at district headquarters, 5920 Linea Del Cielo, Rancho Santa Fe.

“All water agencies are under tremendous pressure to control costs,” said Santa Fe board President Michael Hogan. The district has reduced retirement benefits for new hires and eliminated positions, but, “I think the time is right to have a discussion of what are the other options, including consolidation.”

Over the past six years, the Santa Fe board has imposed 74 percent in rate hikes on its customers, which director Greg Gruzdowich said is equivalent to a doubling of rates when annual increases are compounded.

Water agency officials have long pointed to the increasing costs of “imported water” —which is sold to local agencies by wholesalers such as the Metropolitan Water District of Southern California — as the key driver of higher local water rates.

But Gruzdowich, who was elected in 2012 to the Santa Fe board, believes districts can also do more to keep their own costs in check and reduce upward pressure on water rates.

“This district has done a great job providing quality water to our residents, the issue is could we have done better? The answer is yes, we can do better, and lower the cost for same quality of water,” Gruzdowich said.

The most likely place to look for savings is to reduce administrative overhead, according to Gruzdowich. If two districts merge, he said, they can eliminate administrative positions by serving the combined territory with the equivalent of one administrative staff.

“If you can leverage administrative and support staff for two districts instead of one, that’s where the savings come from,” Gruzdowich said.

But Hogan and Santa Fe general manager Mike Bardin caution that consolidation is a complicated process that will require a thorough analysis.

“It’s very complex and it’s not something that can happen overnight,” Bardin said.

One potential complication is that Santa Fe is one of the relatively few water agencies in San Diego County with its own local water supply, a share of the water in Lake Hodges. That asset provides Santa Fe customers with more water reliability in the event of a drought or disaster, and is also a cheaper source of water when compared with imported water, Bardin said.

That local water supply is one reason why Santa Fe’s rates are in the lowest one-fourth of the two dozen water agencies in San Diego County, and a consolidation could “dilute that benefit,” Bardin said.

“I’m open to the discussion but I want to make sure there’s a process in place that truly identifies any benefits in the long term,” Hogan said.

Gruzdowich said issues such as Lake Hodges water and different wage scales at the merging districts can be managed. For example, he said, under consolidation, a two-tier rate structure could be adopted, providing Santa Fe residents with lower rates because of the assets the district brings to the consolidated agency. And the wages of higher-paid employees could be frozen until lower-paid workers catch up, he said.

“Every one of these reasons I’ve heard for not doing it, you can deal with all of them and find solutions that will work if you’re willing to look and willing to try,” Gruzdowich said.

He contended that a lack of political will is a key obstacle to consolidation of water agencies — specifically, board members who don’t want to give up benefits, including paid medical and dental coverage and per diem payments for attending meetings. Boards also don’t want to be responsible for employee layoffs that might be necessary to achieve savings.

“As long as the water districts can keep raising rates, they don’t have the need to take on these difficult decisions,” he said.

Another Santa Fe board member, Alan Smerican, who was elected in 2012 along with Gruzdowich, said any consolidation plan would have to meet two conditions to gain his support: save money for ratepayers, and be favored by his constituents. A consolidated agency would also have to maintain the district’s current water quality and reliability, he said.

“I’m wondering, what are the odds of all the pieces fitting and that’s what we have to talk about,” Smerican said. “All the pieces have to fit for it to work, and that’s what’s hard.”

Most frequently mentioned as a possible consolidation partner for the Santa Fe district is the Olivenhain Municipal Water District, which surrounds Santa Fe on three sides. However, Santa Fe officials said, their own board must reach consensus internally before any overtures can be made to outside districts.

A full consolidation of two water agencies must be approved by San Diego County’s Local Agency Formation Commission, or LAFCO.

The first step, said LAFCO Executive Director Michael Ott, would be a financial study of the proposed consolidated district.

“We are making sure the entity has enough money to do its job into the future, for a minimum of five years,” Ott said.

The merger could be approved by a majority vote by the board of each district, followed by approval from LAFCO, Ott said. However, an election would be triggered if 25 percent of landowners or voters from the combined districts sign a petition against the consolidation.

The cost of a consolidation would include the preparation of necessary studies, plus a $5,500 LAFCO application fee per district. Ott said over the past 20 years, LAFCO has dissolved or consolidated 80 special districts in San Diego County.

“It ultimately comes down to the people, the customers,” said Ott, and whether they believe they would be better served by a larger, consolidated district, or the local control provided by a smaller agency.

Communities that did merge: Fallbrook and Rainbow

By Joe Tash

As Santa Fe Irrigation District directors discuss the pros and cons of merging with another water agency at a workshop meeting next month, they have only to look north a short distance to the communities of Fallbrook and Rainbow for a model.

The Sept. 12 workshop will mark the first time the Santa Fe board formally discusses consolidation as an agenda item, although the topic has come up frequently at board meetings over the past year or so. Directors have said a merger with a neighboring agency could save money by reducing administrative costs in a combined district.

However, members of the Santa Fe board are also concerned about potential loss of local control over district resources in a merger.

In May, Santa Fe invited Brian Brady, executive director of a joint powers authority formed earlier this year between the Fallbrook Public Utility District and the Rainbow Municipal Water District, to address the board regarding the agencies’ consolidation efforts. The boards of the two water agencies voted in February to form the JPA, which is seen as an interim step toward a possible full consolidation of the two districts.

Under the JPA arrangement, Brady said in an interview, he manages the operations of both districts. So far, he said, the two districts are on a course to save $600,000 to $700,000 this year, primarily from the consolidation of management positions. Those savings are expected to increase in the coming years.

Fallbrook and Rainbow were able to capture the savings quickly because at the time of the merger, several top managers were on the verge of retiring.

“Other districts could go through the same consolidation process and capture the same benefits,” he said, although the process would take longer if they waited for managers to leave through attrition or early-retirement incentives.

According to Brady’s presentation, a full consolidation, which would have to be approved by San Diego County’s Local Agency Formation Commission, or LAFCO, would save $1 million the first year, and $3 million annually by year three.

In his May presentation, Brady said consolidation of the Fallbrook and Rainbow agencies offered such opportunities as reduced administrative overhead, improved emergency response, capturing economies of scale such as shared warehousing and purchasing; and greater financial strength.

“In order for consolidation to work, you have to have the full support of both boards of directors, and you also have to have an employee team, collectively, that is committed to the process. Because employee resistance or board of director resistance during the process slows it down and makes it more difficult,” Brady said in the interview.

“For any two or more districts looking toward the benefits of merging, I believe the JPA process as an interim step allows for a period of time for them to digest all the information they need to really prove out all the benefits, and to adjust — not only the board but employees — to developing a brand-new organization,” Brady said.

In February, Michael Ott, executive director of LAFCO, made a presentation to the Santa Fe board about the legal process of consolidation and related issues.

Greg Gruzdowich, who was elected to the Santa Fe board in 2012, talked about consolidation as one of his campaign issues. And other directors have also discussed consolidation as an option at recent water district meetings.

Santa Fe General Manager Mike Bardin said the purpose of the presentations by Brady and Ott was to help educate board members on the issue of consolidation. The Santa Fe board has taken no official position on consolidation, and the September workshop will allow them to discuss the issue and establish policy guidelines for district staff.