Santa Paula Times

Inquiring minds want to know...

August 24, 2012

By Marsha M. Rea

In the last column I wrote about the City’s Recycled Water Master Plan, which has been sitting on a shelf, waiting to be implemented. This week let’s look at the City of Santa Paula’s structure for providing City-owned utility services to residents and businesses. The City owns water and sewer utilities, having sold the solid waste utility to Crown Disposal Co., Inc. in 2011. Both the water and sewer utilities operate as “enterprise funds” under special rules and accounting regulations of the Federal Government.  

Enterprise funds are established to be independent of the city’s general fund activities and completely self-supporting. Residents and businesses that use water or sewer services pay a rate sufficient to cover all the costs related to providing those services. Operating enterprise funds helps ensure that money is collected from users (rate payers) to cover not only current costs, but also the costs of any needed maintenance, replacement or expansion of the system. (Water and sewer lines must be replaced, new wells must be dug, sewer lines must be cleaned, etc.) In this way the utilities aren’t starved for funds when taxes are low, and utility funds cannot be re-allocated by a City Council or staff to cover other, unrelated costs.

The rates that users pay are set through a professionally designed rate study, which takes into careful consideration current and future costs, and determines which users are responsible for which costs. Rate studies must be updated every couple of years to ensure that newly planned improvements are covered, that inflation is taken into account, and that rates are in compliance with current laws, including California Proposition 218 approved by the voters in 1996. To date, the most recent rate study has not been up-dated for several years.

Several years ago Santa Paula created what is referred to as “The Utility Authority”  (the UA) under whose auspices the remaining enterprise funds operate.  The UA, governed by the city council as board members and the city manager as director, has broad powers to manage the enterprise funds.  Within that umbrella-like framework the UA in Santa Paula “leases” from the city certain services provided by city employees (such as accounting, legal, maintenance, etc.) and the use of assets (pipelines, pumps, trucks, etc.) that are required for the water and sewer enterprises to operate.  This is a mechanism that is used by several cities in California that want/need general fund income from their more prosperous enterprise funds.  Some believe that the practice skirts the legal intent Proposition 218, “the Right to Vote on Taxes Act” enacted in November 1996; however it has not been tested in court. 

It is in this manner that Santa Paula is able to effectively transfer funds from the enterprise funds into the city’s general fund to support administrative functions of other departments.  The money transferred (the payments from the UA to the general fund) is supposedly restricted for capital expenses related to the operation of the enterprises’ businesses. However, the money transferred from the enterprise funds to the general fund frees up money already in the general fund for unrestricted use in support of other city departments. 

The 2011-2012 year-end financial statements of the city and its UA are not yet available, so it is not possible to know the fiscal impact of past transfers on Santa Paula’s enterprise funds.  However, according to the budget adopted in June, $1,407,000 will be transferred to the city’s general fund from the Water, Wastewater and Refuse enterprise funds for “overhead”, during the 2012-2013 fiscal year.  One might ask what overhead this would pay for, inasmuch as the usual and customary operating overhead allocations such as salaries, benefits, consultants, maintenance and office expenses are set out as separate line items in the budget for each fund, and are thus accounted for.  At some point it might be a valuable exercise for the city administration to hold a community tutorial on how the budget is developed.

THE SOLID WASTE ENTERPRISE FUND (Trash Fund):  In 2010-2011, the city sold the solid waste (trash) enterprise fund to Crown Disposal Co. The sale of the fund eliminated a department that was revenue neutral (it paid for itself), was fully self-sufficient and allowed the residents of Santa Paula to invest in assets they owned, rather than paying a portion of their monthly utility bills to benefit a private company.  

Comments by council members at the time of the sale cited a need to “take care of” a $1.8 million budget shortfall in the general fund that still remains unaccounted for and unexplained today.  The shortfall does not appear on any financial statements from 2009 to the present, and is not reflected in the audited financial statement for the year 2010-2011. The 2011-2012 audit is not yet completed. 

Similar to a reverse mortgage, the concept was to sell city enterprise assets (solid waste disposal operations, trucks, etc.) to a private party; for which the buyer would pay the city one-time money that could be used to cover the $1.8 million shortfall.  To be clear, this is not at all a criticism of Crown Disposal, which seems to be doing a good job.  The intent is simply to call into question the rationale for, and the manner of, the sale of a city enterprise that was well operated and provided much needed local jobs for people who live in Santa Paula. 

The writer finds it interesting that despite the sale of the solid waste (the refuse) operation to Crown two years ago, the enterprise fund is somehow still expected to transfer $475,000 to the city’s general fund in the current year.


In 1939 the city built, what was then, a state-of-the-art sewer plant.  Treatment system enhancements were completed during the 1980’s and 90s to remain in compliance with the changing treatment regulations, but the plant remained essentially original. In 2002 the city found itself under pressure from the state Regional Water Quality Control Board (RWQCB) to upgrade the plant treatment process, and faced millions of dollars in fines for polluted discharges into the Santa Clara River. A change in State law in 2002 made the fines mandatory rather than discretionary. Historically the Regional Board had been relatively lenient in imposing fines. The emergency arose due to the city’s failure, over a number of years, to maintain an adequate wastewater treatment system.

In 2007/2008, to meet the requirements of a negotiated settlement with RWQCB to improve the wastewater effluent flowing into the river, the city executed contracts with PERC Water, a small Arizona-based company whose previous experience was limited to building relatively small-scale sewage treatment projects for housing developers, and its funding affiliate Alinda Capital Partners, LLC (Alinda). This contract granted to the PERC/Alinda partnership (known as Santa Paula Water, LLC) a 30-year concession to own and operate the wastewater treatment process in Santa Paula.   The concept was that the PERC/Alinda partnership would Design, Build, Operate and Finance, (sometimes referred to as “DBOF”) a new wastewater treatment plant, at an initial cost of $62 million (including the cost of financing, roughly $125.5 million over the life of the 30-year term of the contract), and giving the city the option of re-purchasing it at a future time. The subsequently constructed plant uses technologies whose components were then, and remain today, untested under long-term use conditions on a scale similar to those in Santa Paula

Had the city chosen another option, to retain ownership and operation of the facility within its own enterprise fund, financing for a new wastewater treatment plant (the recycling facility) was available through state and federal loans and grants at attractive, competitive rates. Once the “sell” decision was made, one might question why, and how, the Santa Paula City Council decided to sell the wastewater treatment function to PERC/Alinda, over the objections of staff, who unanimously supported the bid and design concept of another company, whose bid was lower, and who had significant experience in designing and building large municipal water treatment facilities. The bid process among three proposing companies was convoluted. PERC/Alinda was allowed to revise its proposal for the Design and Build process several times after the initial proposal was due, while the other bidders remained consistent in their proposal estimates. 

The City Manager has stated that the city is currently negotiating with underwriters to issue a new series of bonds which, at today’s currently lower interest rates, could be an attractive way to raise funds to re-purchase the wastewater treatment plant from Santa Paula Water, LLC. Absent a buyback, based on the original financing terms, sewer rates will increase later this fall.  According to the City Manager, the goal of the city is to acquire ownership of the plant and either hold rates static or reduce them.  

Let’s keep in mind the recent statement by the President of the California League of Cities (CLC), that “The cities of California are committed to open and transparent government. It’s our duty as elected officials to ensure that the people have access to the workings of their local government and business being conducted on their behalf. It’s enshrined in the California State Constitution that the people’s business be conducted in a way that is open.” 

When we think about what the President of CLC said (and please do...), I believe it can be useful to look at what other communities in the country are doing to promote civic engagement and open, transparent government.  I would recommend that you visit the website of the city of Margate, Florida ( as an example of what we might want to work toward as a community.  Just a thought...

Next time:  Water, water, everywhere, but not a drop to drink?  Our water storage and delivery systems are at risk.