INDEPENDENT SPECIAL DISTRICTS

INTRODUCTION

The 1999-2000 Grand Jury recommended that the County Auditor-Controller improve the compliance effort concerning the completion and filing of annual budgets and annual financial reports by independent special districts that operate within the County. The 2000-2001 Grand Jury requested that as part of the compliance effort the Auditor-Controller analyze each district’s financial condition to determine if any districts were under funded or over funded. The Auditor-Controller issued a report in May 2001.1 A copy of this report is attached as Appendix A.

As a result of the Little Hoover Commission’s May 2000 report on Special Districts, the 2000-2001 Grand Jury looked into the possibility of combining or eliminating weaker districts for the benefit of County taxpayers. Also of interest was whether any Special Districts were under funded or over funded.

The Los Alamos Community Services District (LACSD) became an obvious candidate for review because previous Grand Juries had warned of potential financial problems. The Carpinteria-Summerland Fire Protection District appeared to be under funded, so it too was a subject for review. Accordingly, those two Special Districts are separately reviewed in this report, even though they are analyzed in the Auditor’s report.

The LACSD has made substantial progress towards financial health. However, the Carpinteria-Summerland Fire Protection District (which must rely on property taxes as its principal source of revenue) was identified in the Auditor’s report as having "…little in terms of capital reserves and still struggles as a going concern."

LOS ALAMOS COMMUNITY SERVICES DISTRICT

Introduction

The Los Alamos Community Services District has had the attention of several Grand Juries since the report of the 1987-1988 Grand Jury, "Loans to Los Alamos Community Services District" was released. That was followed by the 1988-1989 Grand Jury Report, "Los Alamos Community Services District." The 1998-1999 Grand Jury again looked into the LACSD after being contacted by concerned citizens about an increase in sewer service charges, generous pay increases to district staff (19% overall in two years, with two employees getting salary increases of 45%) and allegedly imprudent spending on the part of the Board of Directors. The citizens were also concerned about the availability of future water supplies for the District. The 1999-2000 Grand Jury processed the replies to the Findings and Recommendations for the 1998-1999 Report and concluded, "The LACSD Board has not addressed the continuing deficits over the last several years, and has not adopted a 1999-2000 Fiscal Year Budget as of September 1999. The financial well being of the district should be watched carefully."

The objective of this year’s Grand Jury’s review of the LACSD is to determine the effectiveness of (1) the change in the depreciation schedule for underground lines from 35 to 75 years, and (2) the rate increases for both water and sewer service.

The District

The Los Alamos Community Services District was formed on October 29, 1956 under Division 4 of the Streets & Highways Code for the purposes of providing water for the Los Alamos area. Service began in July 1958. There were concerns that, because well water was being used to supply the needs of the community and septic tanks were being used for disposal of wastewater, the ground water would become contaminated.

On April 8, 1985, a Federal EPA grant and a grant from the California State Government Water Resources Control Board was issued to cover the entire design and development cost to build a wastewater treatment plant, which was completed in 1988.

The County of Santa Barbara extended loans of $181,000 from 1982 through 1986 and forgave the obligation in 1988. In 1987, the LACSD issued and sold $474,242 in General Obligation Bonds at interest rates between 7.65% and 8.35%. The Grand Jury understands that most or all of the remaining balance of these bonds will be paid off in full in September 2001, thereby reducing the District’s annual interest expense.

The LACSD is an Enterprise District which can collect property taxes and receive income from the sale of products or services provided. It has an elected board of five members. Since that Board is responsible to the Los Alamos taxpayers, there seems to have been a desire to keep the rate structure as low as possible.

Financial Data

The table on the following page shows the actual and budgeted Operating Revenues and Expenses for Fiscal Years 1998-2002. Revenues for water and sewer services show substantial growth over the five-year period. This is primarily a result of actual and projected rate increases, and to a lesser extent, an increase in the number of customers.

The large decrease in Depreciation Expenses beginning in Fiscal Year 1999-2000 reflects the change in the depreciation schedule from 35 to 75 years for underground lines. The actual and projected revenue increases combined with the depreciation schedule change have changed the financial picture of the LACSD from an operating deficit of $207,388 in Fiscal Year 1998-1999 to a modest surplus of $3,317 projected for Fiscal Year 2001-2002. Nevertheless, the current operating budget shows a projected loss of $36,899.


Source: Los Alamos Community Services District

The LACSD also has Non-Operating Income and Expenses which are not included in the Operating Budget. These include: connection fees, special tax assessments, interest income, leases for cable and grazing, water meter installation, and interest expense. For the current year the Non-Operating accounts are projected to show a surplus of $22,193, reducing the net loss to $14,707. The Non-Operating Revenues are highly variable from year to year. For Fiscal Year 2001-2002, net Non-Operating income is projected to be $156,692, resulting in a net income (Operating plus Non-Operating) of $160,109, compared to Operating Income alone of $3,317. The Fiscal Year 2001-2002 budget projects 20 new water and sewer service connections with a one-time connection fee of $4,673 for sewer service and $3,131 for water service, for a total revenue of $156,080. If the Fiscal Year 2001-2002 budget is realized, substantial progress will be made towards the recoupment of prior deficits.

Observation and Commendation

The attached Auditor-Controller’s report on Independent Special Districts noted that the District "should be diligent in setting a rate structure that includes replacement reserves" (See Appendix A). The Grand Jury concurs with the Auditor’s recommendation. The Jury also believes that the District Directors have taken the appropriate actions to insure solvency. We commend the Directors for their efforts to become solvent.

However, this Grand Jury notes that without persistent Grand Jury inquiries into the LACSD’s finances and operations over the past three years, the apparently new solvency the District now enjoys might never have been achieved. The Directors need to demonstrate good financial management without such outside pressures.

CARPINTERIA-SUMMERLAND FIRE PROTECTION DISTRICT

Introduction

The Carpinteria–Summerland Fire Protection District (the District) was established on May 6, 1935, by the Santa Barbara County Board of Supervisors pursuant to a petition signed by qualified electors in the proposed District. It operates under the provisions of the Fire Protection District Law of 1987 (California Health and Safety Code, Sections 13800-13970). The District serves a population of approximately 27,000 residents and covers an area of roughly 40 square miles.

The purpose of the District is to provide fire protection and ancillary services to the City of Carpinteria and adjacent, unincorporated areas of Santa Barbara County, including the communities of Summerland, Serena Park, Shepard Mesa, part of the Toro Canyon area, and Sandyland.

The District depends on property taxes as its principal source of revenue. They account for approximately 95% of its revenues. Unlike Enterprise Districts such as water and sanitary districts that directly charge customers fees for the services they provide, non-enterprise fire protection districts do not have this option. Proposition 13, enacted in 1978, and subsequent Legislative action, have severely impacted non-enterprise special districts. Proposition 13 increased the required voter approval for bond debt from a simple majority to a two-thirds vote, making the passage of bonds difficult. The State Legislature has since also shifted a significant amount of property tax revenues from local governments to schools.

Revenues and Expenses

The District’s General Fund has been operating in the red since Fiscal Year 1995-96. Audited financial statements for the fiscal years 1996 through 2000 show a change in the District’s General Fund Balance from a surplus of $307,850 at the beginning of
1995-1996 to a deficit of $354,206 at the end of Fiscal Year 1999-2000. The deficit is because the District’s expenditures have regularly exceeded revenues, as shown in the table on the following page.


Source: Carpinteria-Summerland Fire Protection District

Auditor-Controller’s Analyses

In the Auditor-Controller’s May 2001 report on Independent Special Districts (See Appendix A), the Auditor noted that the District lost a significant amount of its funding with the loss of property tax revenues as a result of the shift of property taxes to schools.

This report also indicated that while the district is relying on revenue growth to balance its annual operating budget, it barely makes it through the year. The District has little in terms of capital revenues and will struggle as a going concern. The report recommended that the District should consider raising special taxes, seeking legislative solutions to improve its revenue base or consolidating with another district for long-term viability.

In the CARPINTERIA–Summerland Fire ProTection District Annual Financial Report for the Fiscal Year Ended June 30, 2000, the Auditor noted that the District has projected a 10% increase in property tax revenues each year over the next two years, and plans to limit fixed asset expenditures through fiscal year ending 2004. The District projects, on a budgetary basis, that the trend of expenditures exceeding revenues will reverse by the fiscal year ending 2000-2001 and the general fund balance will be at a positive level by fiscal year ending 2001-2002. The report continued, "While the District is aware of its financial position, and is relying on the projections stated above, the uncertainty over the District’s ability to continue as a going concern is again applicable due to the occurrence of the deficit for the current year."

Observations

The Grand Jury recognizes that tax revenues are the principal source of income to the District, and increasing this revenue source presents major challenges. We also believe that the Auditor-Controller’s assessment of the District’s precarious financial condition is correct and that there is justifiable concern over the District’s financial viability.

Although the District’s own financial projections indicate that the trend of expenditures exceeding revenues will be reversed, the Grand Jury is well aware that budgetary projections are fraught with uncertainty and may not always be realized. The District’s financial condition is such that additional revenue sources should be vigorously pursued.

FINDING AND RECOMMENDATION

Finding 1: The Carpinteria-Summerland Fire Protection District is in precarious financial condition and may not be able to continue as a going concern.

Recommendation 1: The District should seriously consider: (1) seeking additional sources of revenue, such as putting a special fire tax on the ballot, (2) seeking legislative solutions to improve tax revenues, or (3) consolidating with another fire protection district.

AFFECTED AGENCY

Carpinteria-Summerland Fire Protection District
Finding 1
Recommendation 1


1 "SANTA BARBARA COUNTY INDEPENDENT SPECIAL DISTRICTS, Compliance Report for: Annual Financial Reports, Annual Budgets and Research Report On Districts Current Fiscal Strengths or Vulnerabilities," May 2001, Office of the Auditor-Controller.