By Ruth Musser-Lopez
Controversy has broken out in San Bernardino County’s wettest city over a proposed significant hike in water rates as of May 1, 2016. For some people, the change in billing arrangements will not result in hefty increases. For other customers, there will be a substantial hike in the price they will pay for water. Further, the wastewater rates will be increased for everyone with the rate change paid by the Needles Unified School District being one of the most extreme, increasing roughly 300% from about $3,000 to a projected $8,617.89 per month.
Needles, with a population of 4,494, is located on the west bank of the Colorado River at San Bernardino County’s far east extreme. The City holds perfected Colorado River water rights which means that that this small government corporation is allowed to pump water directly from the water table on the west side of the river, eliminating any need to purchase water from others. The city’s cost in securing water is thus only that in securing and operating pumps and the infrastructure required to store and deliver the water.
Nevertheless, the city’s water enterprise is now almost $4 million in the red.
Implying that something has precipitated a need to do so, city officials point to Proposition 218, a law passed in 1996, and Proposition 26, passed in 2010, as the cause for sudden and increased rate increases. Upon questioning, however, city officials reluctantly acknowledged that under Proposition 218, if 50 percent of the rate payers object in writing, the new proposed new rate structure fails.
The failure of the rate passage would in all likelihood result in an investigation into the past collection of unapproved taxes and what appears to be unlawful multi-million dollar transfers and expenditures of electric utility funds into the water and wastewater accounts without the approval of ratepayers. Litigation and demands from its approximately 3,000 customers for rebates and damages could literally bankrupt the city.
Calling the unlawful rates and transfers “unfair subsidies” and “unintentional inequities,” Needles City Manager Rick Daniels downplays their significance and was quoted as stating that the 1996 state constitutional amendment, Proposition 218, was passed after the unfair rates had been voted in place. The accuracy of Daniels’ representation is in dispute.
Daniels asserts that the last water and sewer rate increases were in 2002 but that a 2006 study showed both were undercharged. Public dismay with this statement was exhibited at the February 8 public hearing on the matter at the Needles City Council meeting, with several in the audience agreeing that they had checked their bills and their rates had been going up consistently over that period of time.
This discrepancy appears to be due to the fact that the current rate structure, voted in place by the city council in 2002, included incremental annual increases without requiring a new vote of the council each year. New council members never changed the structure. Proposition 218 requires voter approval on any fees charged by a municipality or government enterprise that are used for other purposes than the service provided. However doubtful it seems, water and waste water rates arguably may have been undercharged in 2002, but the fees for electricity were admittedly an overcharge according to Daniels.
The 2015 draft audit report for the city shows that the city has in the past transferred over $3 million from the electric fund into the water fund and transferred over $3 million from the electric fund into the sewer fund.
A check of immediately available public records did not turn up record of a vote by the council to make such a transfer of funds and it is yet unknown when this transfer was made and who was responsible for making it. The report also shows a net 2015 year end position of $5,196,110 in the electric fund.
Daniels stated that the city had received a four page document from its attorneys expressing the need for compliance with Prop 218, and Prop 26, as well. He explained that the Needles Public Utility Authority was created in 1997 when a multimillion dollar bond measure was passed. Since then, financial statements were combining revenue and expenditures of the utilities.
“Propositions 218 and 26 do not allow that. Under those dictums, a municipality cannot combine the rates and charge a fee for each of them. Propostions 218 and 26 both hold that if a city charges a fee that is more than providing a service then it is a tax and needs public approval. Proposition 218 states that property assessment fees are assessments for services to the property—the city cannot charge anything over what it costs to provide water service or else it is considered a tax.
Has there been ongoing hanky panky within the City of Needles’ complicated utility departments? Needles, San Bernardino County’s smallest city, is also one of only two of San Bernardino County’s twenty four municipalities which can boast a full services utility division. Along with Colton, Needles has an electrical utility division, water utility division and sewer utility division. These utilities exist as quasi-enterprises run by the city. Attending such enterprises are provisions of state law including the constitutional amendment authored by Democrats, Henry Mello and Mike Roos in Prop 218 which are intended to keep each utility’s operational account separate from other municipal operations. It is often the case, however, that cities, particular ones that are cash strapped, poorly managed, or purposely preyed upon by corrupt public officials, as in the case of Bell, city officials will make raids upon the utility accounts, borrowing from Peter to pay Paul, and using money intended for one particular operation to cover the expense of other purposes.
What appears to have been happening in Needles is that the electric customers did not realize that they were being overcharged, the unapproved tax dollars were being spent by transfers out of the electric utility enterprise into the waste water and sewer departments, and likely into other departments as well. Had the cost of these fund transfers been tacked on to the charges made from its water and sewer customers at the time, the public would have objected, possibly revolted or would have run a recall against the council at the time. The overcharges were simply tucked away and rolled over on the books year after year.
These transfers are considered to be hidden taxes since the fees were not used for the purpose for which they were collected. Proposition 218 specifically regulates city-related fees and taxes on utilities and defines as “taxes” any fee charges made and collected that go beyond covering the cost of expenses and requires voter approval of such fees or hidden taxes.
“Proposition 26 regulates electric rates but the same concept applies,” Daniels said. “When we took it apart it was found that the electric enterprise was charging more than it cost and water and sewer was charging less than what it cost. Not that there were errors, but the charges had not reconciled.”
Daniels stated that the electric rate overcharge had already been addressed with reduction to the electric rate for the typical average family home by about $25.81 /mo. He stated that electric will be reduced even further in the future, but that while electric rates were addressed, water and sewer were not. In total, he said, “water and sewer had run a deficient of $6 million and that this was unfair.” This deficit must be divided among the 1,300 water customers and the 1,400 sewer customers, he explained.
To sell their rate increase product, Daniels asserts that the average household will net a savings of $5.44 after all of the adjustments are made in electric, water and sewerage/waste water. “We have found that there were subsidies on the old rate systems,” he said. “Some customers were not being charged and others are being charged more…. For example, a mobile home park that was under the current rate structure was not being charged what it cost us to provide the service. The city itself was not being charged for water and sewer service.
“The current water usage charge is $1.54 per 100 cubic feet of water used, and includes an allowance of 1,000 cubic feet for single family residential customers. The proposed water usage charge would eliminate the 1,000 cubic feet allowance and charge all customers the rate of $1.85 per 100 cubic feet. Now, everyone will pay the same $1.85 per 100 cubic feet regardless who you are. There will be no special deals for individuals or classes of people. No one subsidizes the other class. There will be a strict reading of the law. The utility board feels that that is the honorable, equitable thing to do. It gives people the ability to, if they want to, pay lower bills. They can reduce consumption of water.”
The rate is based upon a calculation as to what would need to be charged in order for the city to cover the cost of its operations, which is currently roughly two million dollars for the water department.
Per residential household, currently the city charges a “basic service charge” of $38.91 on top of a metered water charge of $1.54 per 100 cubic feet of water for the first 1,000 cubic feet by a single family residential customer.
In a draft 2015 audit report secured by the Sentinel, the total charges to customers for water services is reported to be $1,428,959 while total operating expenses is reported to be $1,416, 691 for a total operating income of $12, 268. Not counted into this equation however, is the interest expense of $460,895 and the $187,754 which was transferred to the city’s general fund from this enterprise, thus bringing the next position of the enterprise at year’s end to a deficit of $3,681,333…almost $4 million in the red even though the city owns its own water and pays nothing beyond pumping costs to obtain it.
So what are the city’s operating expenses that make up the roughly 2 million spent every year in a water department that pays nothing for the actual water itself? For one, a city franchise fee of $66,463 on top of $187,754 that was reported to have been transferred to the “city” as an “operating transfer.”
Arguably, the administrative costs in managing the electric, water and sewer enterprises are disproportionately high compared to that allocated to the boots on the ground, maintenance/utility workers, especially considering that the same administration manages all three utilities.
Only four out of the 12 employees paid out of the water department fund are actually water plant operators. According to the city’s 2016 budget, the administrative management expenses for the water department is $196,890 and accounts for nearly 14 percent of the department’s operating expenses while salaries and benefits are 30 percent of the operating expenses, or $434,823. Employees (and the percentage of their salary paid out of the water department funds) include: city manager (9% of $265,000) assistant city manager (13% of $147,407), secretary to the city manager (15% of 88,542), building and safety/utility department assistant (10% of $67,700), community development department assistant (8% of $61,875), engineering tech II (19% of $76,053), director of finance (2% of $117,500), finance assistant (19% of $127,894), human resource specialist (5% of $70,600), account clerk III (13% of $68,000), city clerk (3% of $75,000), materials coordinator/serviceman (15% of $65,766), chief water plant operator (100% – $104,400), water foreperson (100% $90,900), and two water operators in training (100% – $44,300 each). On top of that, $37,700 is budgeted for department overtime and $34,800 is budgeted for department on call expenses.
The waste water division will be charging the school district $8,617.89 per month, the hotels each $1,395.74 per month, campgrounds $4,710.64 per month, the hospital($778.88 per month, residences $41.54/each and the Mojave reservation $4,527.86 per month.
According to the 2015 audit report, the break down for the wastewater/sewer department shows administrative management expenses are $115,347 and salaries/benefits at $206,348. Authorized positions for the waste water treatment plan includes a chief plant operator and three technicians, however the 2016 budget provides for absolutely no treatment plant employees. City employee funding is going to administrative positions or other positions in a breakdown similar to the water plant operation (minus the operators) but with slightly smaller percentages of the total salary/benefit package coming from waste water revenues. In large portion, operating expenditures goes toward contractual services apparently to run the treatment plant to the tune of $366, 045.
The situation is even more pronounced in the electric department where two linemen positions were recently cut. The authorized positions in the electric department are now one line supervisor and two power line technicians. According to the 2016 budget report, the break down for the electric enterprise is $920,553 for salaries and benefits plus $395,073 for administration and management. The budget report states that the electric department pays salary/benefit to the city manager of $49,900 or 19 percent of his total salary, assistant city manager $39,800 or 27 percent, secretary to the manager $28,800 or 33 percent, building and safety/utility dpartment $10,250 or 15 percent, community development assistant $9,625 or 16 percent, engineering tech I $29,400 or 41 percent, director of finance $4,700 or 4 percent, finance assistant $47,900 or 41 percent, human resources $7,900 or 11 percent, city clerk $3,750 or 5 percent and account clerk III $18,400 or 27 percent. Budgeted for department overtime is $80,800 and for on call duty is $41,800
Management is typically paid from multiple funds with duties overlapping all utility departments. But these percentages of the total expenses in a department change if an expense called “depreciation and amortization” of $313,767 in electric, $307,833 in water and $344,378 in waste water for a total of $985,978 are taken out of the equation. It is unknown at this writing if this total is an expense deduction for this year’s purchases or if these purchases were made in prior years. If made in prior years, amortization may not actually involve a transfer of money in the current year…and instead may be a hidden unknown transfer of about 1 million dollars.
In attempting to justify a rate increase, the city has downplayed the admission to commingling utility funds in the past to the tune of over 6 million dollars. Daniels spends a great deal of time bringing attention to the state-mandated conservation goal of 25% less use of water and the new reporting requirement. He asserts that a water rate increase is an economic incentive to reduce water usage.
Other tactics for gaining public support for increasing the city’s own taxes are also used. Standing before the audience of concerned citizens and ratepayers at a series of public hearings required under Proposition 218, Jerry Porter, chief water plant operator, held a scrap of deteriorated rusty pipe connector, representing that this is the current state of disrepair of much of the city’s infrastructure. The new increased charges, he claims, are in part to address maintenance and replacement needs and costs.
Porter and Daniels spent much of their public address outlining a litany of maintenance concerns which include the replacement and repair of pumps, pipes and tanks. Examples are a well that collapsed and failed and the cost of a new well, with an output of 2,200 gallons per minute using a 300 horse power motor and 24 inch stainless steel casing, being $600,000. Daniels reported $784,000 to refinish tank reservoirs and install additional steel plating in four of them.
While these expenses would appear to benefit all residents equally, it is known that at least one well appears to service the golf course only. And there are some expenses that seem to benefit only certain classes such as the people of a well-to-do subdivision known as “Gates.”
Daniels boasted of the city’s investment in a large decommissioned tank reservoir that was purchased from San Louis Obispo for $150,000. He said that there was nothing wrong with it, it had been used as a temporary storage tank while that city finished building its larger reservoirs. The intent is to install that tank, now sitting on pallets, in the Gates subdivision of Needles where there is currently a low water pressure problem.
Another upscale subdivision adjacent to the golf course known as “Chesney’s Subdivision” where Councilman Tony Frazier resides, boasts a large private pond and fountain. In one unverified statement to the Sentinel, the water is supplied through a city pipe but the meter is never read. In another statement, the water is being diverted into the pond illegally from the Colorado River, but it has been stated that no one is supposed to know this. Mr. Robert Chesney, who built the subdivision, formerly worked for the Bureau of Reclamation and it is widely reported that he had inside information and figured out how to acquire the property on which he built the subdivision next to the river and “Bureau Bay” that the Bureau of Reclamation manages. Chesney sat on the city’s utility board for many years.
The outrage on the part of some longtime residents, those who were around in the 1990s, is that the 1997 bond measure for in excess of 25 million dollars was supposed to address the kind of problems that city officials, including the utility board members, are again requesting funds for. Old timers claim that they were promised that the rate structure established at the time the bond instrument was passed would keep the city in good standing for 30 years to come…or 2027 when the bond is paid off.
Daniels admits that “the cost of utilities has not changed that much in the last five years despite the fact that internal costs have increased. Liability, property, materials prices have increased” he said. “Anything that comes into contact with water should be lead free. Costs have been going up but we have been able to hold down the cost.”
Meanwhile, during the presentation and in written notices to the water and sewer ratepayers, Daniels asserts that Propositions 218 and 26 have caused the need to increase rates, saying that the rates are not fair, are unjustly applied and are not sufficient to pay for the cost of providing the service. Daniels injects just enough verbiage into the record to assert that the city is now doing the right thing to reconcile the unlawful practice of commingling the funds.
The hidden taxes imposed upon the Needles ratepayers in the past were approved by the city council and utility board. Anthony Frazier has been on the city council since 1994, and is the panel’s longest serving member. He was there when the bonds were issued in 1997. Terry Campbell, a former city councilman, was not re-elected in 2014, but the remaining council quickly installed him as a utility board member. He claimed that a year and a half ago the board commissioned a company called EES Consulting and began a move toward an “equivalent dwelling unit system” as a means of billing. The waste water rate increase and the history of mismanagement of the sewer plant in the past will be addressed in Part II of this article to be published in next week’s Sentinel.
The present council voted to extend Rick Daniels’ term as city manager and present pay, with planned increases to his six figure salary/benefits of $265,000, for another 5 years, well beyond the elected term of all the council members presently sitting on the council.
Daniels admitted publicly that the electric ratepayers may be due a rebate.
Following the meeting, Councilman Frazier, however, expessed his belief that there would likely never in his lifetime be sufficient funds for the electric department to repay those who had originally paid the over six million dollars in overcharges and that the more than $3 million deficit in both the water department and the wastewater department would likely be sitting on the books and rolled over for many years to come.
Public comments at last Tuesdays council meeting evidenced ire and a growing discontent among the residents. One claimed to be representing the attitude of many and threatened to leave Needles and move across the river to nearby Lake Havasu, Arizona where the water service charge is only $5.00 per month compared to Needles’ current $38.91 current basic service charge that will only be lowered by 42 cents under the new rules. A mass exodus was forecast by this resident, who pointed out that in Lake Havasu ratepayers are able to have access to multiple services and grocery stores plus a large trendy shopping mall whereas, he said, at the present time, Needles does not even have one grocery store.
Locally, it is current theory that a mass exodus is exactly what the city council and utility board desire, hoping to privatize all of the city’s assets including its water and electric company. The city council recently sold its hospital for pennies on the dollar, a facility which had originally been built and paid for by the taxpayers in the community’s hospital district. The council in recent years has also considered selling its golf course.
The ongoing gradual exodus of the population from Needles has been attributed as one of the official reasons for the cost of both the water and sewer services rising. City officials claim that they have cut costs all that they can but that cost must be spread over fewer and fewer customers so each customer must pay more.
Some residents disagree and blame the city council for excessively high administrative costs, observing that a nearby city, Kingman, Arizona, which is much larger than Needles, hired its city manager for $128,000 while the Needles City Council pays its newly hired manager, Rick Daniels, over twice that figure—$265,000 for salary/benefits. Blaming either poor negotiating skills on the city council or purposeful intent to break the city, they claim that Daniels was being booted out of Desert Hot Springs at the time Needles picked him up and he probably would have settled for a much lower salary.
It is anticipated that the turnout at these public hearings will continue to climb.
Before the meeting adjourned one resident spoke from his seat, saying that more people need to attend, especially in light of the fact that sufficient timely written objection could kill the rate increase. The next hearings are to be held at the Needles City Council Chambers on Friday—February 19 at 5 p.m., Saturday—February 20, at 10 a.m., Wednesday-February 24, at 5 p.m. and Thursday—February 25 at 5 p.m.
By Ruth Musser-Lopez