Without a title

September 10, 1996

Presiding Judge of the Superior Court

Post Office Box 21107

Santa Barbara, California 93121-1107

Re: Response to Grand Jury Interim Final Report Relative

to the City of Solvang and State Water - released June 17, 1996

Your Honor:

The Solvang City Council wishes to express its appreciation to the 1995-1996 Santa Barbara County Grand Jury. The report reflects a great deal of effort and dedication toward studying the issue. Although the report listed some shortcomings of the City, it did bear out that there should be full disclosure on this type of an issue so the voters may make an informed decision.

Comments to Findings and Recommendations

Findings and Recommendations 1 through 3:

First, the City obviously agrees with the central finding of the report, that is, the information made available to the public in 1991 concerning state water was not adequate to fully inform either the electorate or the City about the true costs of state water. Ballot Measure K-91 only authorized ID-1 to proceed with state water to the extent that the capital costs for the project did not exceed the maximum indicated in the Ballot Measure, that is $18.4 million. The fact that ID-1's share of these capital costs are now projected to exceed more than twice that amount highlights the fact that the state water project actually constructed was not authorized by the voters. The Grand Jury's description of the election as advisory may be somewhat misleading. Approval of the K-91 Ballot was a legal requirement for proceeding with state water under the terms of the Water Supply Retention Agreement entered into between ID-1 and the County Flood Control and Conservation District. ID-1 could not have proceeded with state water without a favorable electoral result. Therefore, the fact that the costs of the project have so greatly exceeded those authorized by the electorate totally undermines the legal basis on which state water was brought into the Santa Ynez Valley.

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September 10, 1996

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An issue not focused upon by the report is the fact that the state water contracts which were entered into by ID-1 and Solvang do not authorize the expenditure of funds for capital costs associated with the Department of Water Resources ("DWR") portion of the Coastal Aqueduct. The definition of "Fixed Project Costs" in these contract specifically do not include DWR capital charges. Thus, these contracts require payment of capital costs associated with the local in-county facilities; neither of these contracts require or authorize the payment of funds for capital costs associated with the DWR Coastal Aqueduct facilities. Therefore, the contracts and the understanding of the electorate are consistent; charges for capital costs in excess of $18.4 million were simply not authorized by the election or the operative contracts.

This issue may become more important to all jurisdictions in the coming months. The reason is that project costs are subject to what are generally referred to as "step-up" provisions in the event a party to the state water contract defaults. For instance, if a party defaulted on the payments to the extent of $1 million, the other parties would be asked to pay additional monies to make-up this short fall. However, to the extent that such shortfall is caused by payments of DWR capital charges, the City believes other jurisdictions may refuse to pay such additional charges because the DWR charges are not "Fixed Project Costs" and therefore not subject to the "step-up" provisions.

Second, the report was very frank in its treatment of the administration and City Council of that period. In retrospect, it may be claimed that the City should not have relied upon statements and representations made by representatives of ID-1 about the advisability of state water. However, the context in which the City of Solvang made its decision must be appreciated. Representatives of the City learned for the first time in July of 1991 that the City would be asked to sign a separate contract for state water and would not receive state water supplies simply as a customer of ID-1. The City was told that its entering into this contract was an essential element of selling bonds that had been authorized by the June of 1991 election and was being required by the bond rating agencies. The City was also told that it had to enter into the contract immediately because decisions about the sizing of the pipeline were being made. Solvang has now learned during the course of its litigation that no bond rating agency representative ever required a separate Solvang contract and its decision with respect to entering into the contract certainly could have been delayed.

Given the manner in which the issue of a separate contract was pressed upon Solvang by ID-1 and the more than 70% favorable vote of its electorate, Solvang acted to implement the electoral mandate on state water, relying upon representation of ID-1 representatives. Those representations included statements by ID-1 that (1) state water would cost at most $1,000 per acre-foot; (2) ID-1's share of capital expenditures for state water would not exceed $18.4 million (3) state water would be a reliable source of water; and (4) state water, although more expensive

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than water in 1991, would be less expensive in the long term than developing other sources of

water. At the time that City officials accepted these representations, the City had enjoyed a thirty-five year relationship with ID-1 and had viewed the District as the experts on state water and water matters in the Santa Ynez Valley. ID-1 was a public agency that included all of Solvang with Solvang voters constituting approximately half of the electorate of the District. It is against the backdrop of thirty-five years of working with a public agency that represented Solvang citizens and proclaimed itself to be the expert on state water issues that the City Council and administration accepted the statements and analysis made by ID-1 officials. In hindsight, the City should not have trusted these statements. But, the City, the electorate, and the news media did.

It is interesting to look at the numbers that were being proffered by ID-1 officials then and compare these numbers with their current positions. The bond issue authorized by the voters in June of 1991 was $18.4 million. If the bonds were to be repaid over 30 years with an annual interest rate of 7.5%, the principal and interest alone would amount to slightly more than $1,534,000 per year or $767 per acre-foot. Additionally, there would be substantial additional expenses for treatment ($110/acre-foot according to the EIR), other operation and maintenance, administration and unforeseen problems. Therefore, when ID-1 officials stated that the costs would not exceed $1,000 per acre-foot of water, this figure seemed consistent with the $18.4 million maximum approved by the voters. Thus, the City and the electorate could do the simple math referred to in the letter by Mr. Roden (legal counsel representing ID-1 in the litigation with the City), and confirm the $1,000 per acre-foot bandied about by the ID-1 representatives. If one checked the EIR for the project (Table 11-7), it lists the anticipated project costs to be $950 per acre-foot of water for the Santa Ynez Valley. Thus, the EIR made the $1,000 per acre-foot representation seem even more credible.

Now, ID-1, through Mr. Roden, is trying to tell Solvang that "simple math" would have made it obvious that $1,000 an acre-foot was obviously too low a figure to believe. In accordance with Central Coast Water Authority projections, next year the costs will rise to $1,600 per acre-foot of entitlement with no guarantee of any water being delivered. Apparently ID-1's current position is that everyone should have known that a maximum of a $1,000 per acre foot was 60% too low. If we accept Mr. Roden's argument, the impropriety of the K-91 ballot measure, as well as ID-1's repeated representations about state water costs, becomes even more apparent.

The Grand Jury report also raised the question of recall. A recall of the present Council members is not viable as there are only two members who were on the Council in 1991. One of those members is not seeking reelection in 1996 and the other members was reelected in 1994 when state water was a campaign issue and cast the only "no" vote on the agreement.

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September 10, 1996

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The Grand Jury also recommended ongoing evaluation of the competence of senior staff. The City has ongoing evaluation of all its personnel, including senior staff, through annual performance evaluations.

Finding and Recommendation 4:

The Finance Committee is not empowered to make any decisions as a committee. It serves as an advisory body to the City Council convened in a public meeting.

It would be difficult for a non-Council Finance Commission to be fully informed about the City's programs and needs. It would also be difficult to establish priorities for City financial decisions. Financial decisions, including budget, are not generally assignable. The City Council would welcome expertise from community members with the understanding that a Finance Commission would be no more, or no less, than the Council Finance Committee, that is, an advisory body to the City Council.

Finding and Recommendation 5:

The two trustees of ID-1 elected from the Solvang area have a public trust, duty and obligation to represent their Division constituents - that is the reason for the Division make-up of ID-1. ID-1 is a separate public agency, of which Solvang is a part. Solvang would not anticipate ID-1 to breach a long standing trust by not providing full disclosure. ID-1 owed the voters of Solvang and all the other voters in the district full information as to the true cost of state water. The fact of the matter is that none of the districts constituents knew the "WHOLE STORY" relative to the 1991 bond vote.

There has been no cooperation or accountability by the present Solvang Trustees serving on the ID-1 Board. Solvang electors need to take a greater interest in the ID-1 Board's activity and ensure that the Solvang Trustees represent the interest of the Solvang electors.

In addition to the Grand Jury's recommendation, Solvang voters should elect Trustees to ID-1 that would keep the City informed and not ignore the voters that specifically voted them into office.

Finding and Recommendation 6:

Solvang has under consideration multi-year budgets. However, a multi-year budget did not seem practical this year given the moving target costs of state water and the outcome of the City's litigation. A multi-year budget would have to consider the full cost of state water as a worst case scenario and whether state water should be subsidized and by how much from the

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general fund. There is no objection to multi-year budgets; however, how meaningful they would be pending outcome of the litigation is debatable. The Solvang City Council has devoted many hours to state water.

The City Council has held two public meetings at the Solvang Veterans Memorial Building in accordance with the Grand Jury's recommendation. The meetings were well attended and the main input was clear: "Get us out of state water" and not how to otherwise solve the financial problem.

Also in accord with the Grand Jury's recommendation, the City Council did move to hire a water rate specialist. However, the firm has since declined the contract award due to work load and a possible conflict of interest as it has also been utilized by ID-1. The process must now begin all over again.

A lifeline rate has been under consideration. However, at best a lifeline rate could only generate a token saving. A lifeline rate would also be a dual subsidy from other ratepayers and the general fund.

It is the intention of this City Council to retain the supplemental water fund which was initiated by the preceding City Council under a different name. In fact, almost $1,000,000 was recently added to the fund reflecting the difference in the City's income and expenses for fiscal year 1995-1996, indicating belt tightening.

The City Council agrees conceptually with multi-year budgeting.

Findings and Recommendations 7 through 12:

The City Council concurs with the findings concerning the ballot issues.

Finding and Recommendation 13:

It is difficult to predict the future. However, it appears likely that water rates will have to increase unless Solvang gains relief through the courts.

Tourism is the only industry the City of Solvang enjoys and there is a limit to the local taxes, fees, assessments, charges, etc. that can be expected from this source if business is to remain competitive. Without a viable tourist industry, Solvang would suffer dire financial consequences.

Presiding Judge of the Superior Court

September 10, 1996

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In its two public meetings on state water, the City Council received little input as to how to solve state water costs other than the constant statement: "Get us out of state water". The City Council is considering various revenue enhancing and money saving suggestions set forth in the Grand Jury Report. At this time it is actively pursuing an increase in the TOT tax from 8% to 10% which is projected to raise approximately $250,000 annually.

In the Council's effort to assist its ratepayers by using general funds to subsidize water rates, the question of the legality of such a subsidy has been raised. The Grand Jury report and the City of Solvang assumes that the subsidy from the general fund is legal.

The City Council must consider the future of Solvang very carefully. Although it wishes to assist with water costs, it cannot jeopardize funding for its basic programs and responsibilities to maintain a full service City.

The City Council believes the City's position as to litigation is righteous and our best hope to address our financial crisis.

Very truly yours,

Elaine W. Campbell

Mayor of Solvang