Ontario city officials raided the city’s water enterprise fund for more than $120 million from 2008 until 2021, the Sentinel has learned.
Fifteen years after the city initiated a repeated practice of diverting specific money to purposes other than those to which under California law it must be devoted, the money has not been returned.
Nevertheless, city officials in October 2021 boosted the average rates city residents and businesses pay for water by 3.6 percent and hiked the rates by another 5 percent in July 2022. The Ontario City Council is scheduled next month, on July 18, to consider increasing those rates by 6.67 percent, and is further on track to up them by 5.23 percent in July 2024. Thus, over the course of two years and eight months, the city will have raised its water rates by 22.14 percent.
As the city’s officials ready themselves to make those increases, a growing number of city residents are questioning why they are being subject to the rate increases, given what has been characterized as the city’s inappropriate looting of the water fund. Specifically, those residents say, the city ran afoul of Proposition 218, which was passed by the state’s voters in 1998.
Proposition 218 put in place strict rules for raising fees and taxes in California. Under its provisions, a municipality cannot shift the cost of providing services under its general fund to utility ratepayers.In the fall of 2007, a financial panic, the table for which had been set through excessive risk-taking by global financial institutions and a severe contraction in the United States housing market following years of predatory lending targeting low-income homebuyers, resulted in an across-the-board collapse in the value of mortgage-backed securities. What ensued was both an international and domestic financial downturn, the latter of which took root at the national, state and local levels. Those economic doldrums would persist for more than seven years, becoming what in common parlance was known as “the Great Recession.” The accompanying diminution in revenue at the state and local governmental levels led to a substantial degree of belt-tightening by cities, which entailed in many cases layoffs, employment contract renegotiations leading to salary freezes or wage and benefit reductions, the decrease in services or other financial fixes.
Among several cities, including Ontario, one strategy applied was borrowing from municipal utility funds often referred to as enterprise funds. In Ontario, at that time led by then-City Manager Greg Devereaux, the city undertook what was initially planned as a temporary solution to a cash flow problem considered to be fleeting. That remedy consisted of taking money out of its water utility fund to shore up the city’s general fund. This solution was one that was originally intended to last only a short time, essentially just as long as the recession continued. Upon the onset of an economic recovery, the borrowing would end and as the economy normalized, the money that had been taken out of the water department’s account would be repaid, or so was the stated intention.
In early 2010, San Bernardino County lured Devereaux away from Ontario to install him as the county chief executive officer, and the Ontario City Council elevated the city’s fire chief, Christopher Hughes, to the city manager’s position. Hughes, while well-versed in running the fire department, had no real experience in managing a municipality, and the task of overseeing a city as large, complex and variegated as Ontario was a challenge on multiple fronts, not the least of which was maintaining its financial integrity. If the idea had been to keep Hughes in place as city manager just long enough for the city to seek out a municipal managerial professional more accustomed to the intricacies of keeping all of the moving parts of a city in harmonious motion, that effort was sidetracked, and Hughes remained as city manager more than three-and-a-half years. Since he inherited a budget that was dependent upon – one might even say addicted – to the augmentations from the city’s water fund, Hughes never knew anything different. In the 2010-11, 2011-12, 2012-13 and 2013-14 budgets that were prepared under his watch, borrowings from the city’s water fund to balance the general fund budget became institutionalized. So, too, when then-Assistant City Manager Al Boling transitioned into being Ontario’s city manager in October 2013, the city had grown so accustomed to using water fund money as part of City Hall’s operating budget he continued pulling out at or around $10 million per year from the water department to finance basic city operations. Boling lasted four years as city manager, and in November 2017, he was replaced by Scott Ochoa, who had previously been city manager in Glendale.
Under Ochoa, the transfers of money – at a clip of nearly $10 million per year – from the water fund to the city’s general fund continued. That “borrowing,” as it were, was no longer justifiable. The 2007 economic downturn had proven abnormally persistent, lasting until 2013 as measured by some indicators. By 2014, the United States, California and the Southern California Region had shaken off the financial doldrums, and in the public sector, among county and municipal governments as well as virtually all governmental agencies, the healthy revenue levels of 2006 had been restored and in virtually all cases surpassed. Not only had the time to discontinue the transfers out of the water fund come about some four years before Ochoa arrived, but it was now high time, as had been intended by Devereaux and the municipal management team that surrounded him in 2008, that the flow of money be reversed such that the city’s general fund began to reimburse the city’s water utility all of the money that had been taken from it over the course of the previous six years.
But the lack of fiscal discipline in the Ontario bureaucracy that flourished under Boling did not magically or simply vanish with the arrival of Ochoa. Actually, in the first several months that Ochoa was at the helm in Ontario, he did not know that the raid of the water fund that was taking place that year was going on and he was equally oblivious that it had been occurring for what was at that point nearly a decade. It was not until he had been ensconced as city manager for several months in the late winter of 2018 while he was looking forward to the framing of the 2018-19 budget that he took stock of the fact that taking money out of the city’s water department for use elsewhere was de rigueur in Ontario. At that point, relatively newly arrived in Ontario, with a city council that was long accustomed to operating as the leadership of a city with an annual operating budget well above half of a billion dollars – putting it head and shoulders and half of its trunk financially above the next wealthiest city in San Bernardino County – Ochoa was not sure enough of his footing to make any major departure from what was traditional in the city he was being entrusted with managing, at a salary no less of $320,229, with perks and add-ons of $31,633 and benefits of $74,332 for a total annual compensation package of $426,194. Similarly, in 2019 with the 2019-20 budget and in 2020 with the 2020-21 budget, Ochoa was not yet sure enough of himself to confront his political masters on the city council and strongly suggest that the city ween itself from the practice of looting its water department of money that by the rule of law and code of common decency should have been used all along to maintain the infrastructure required to deliver the elixir of life to the city’s residents and businesses.
By 2021, however, Ochoa could no longer hold in abeyance his conscience and the sense of overhanging doom that awaited him and the other bigwigs at Ontario City Hall if he continued rolling the dice by misspending the city’s water division money. Sooner or later, and quite possibly sooner, someone with authority and maybe even someone with the power of prosecution was going to take note of what was going on, he realized. At that point, with the 2021-22 budget, the diversion of water funds ended, 13 years after it had begun.
While that page in Ontario history has been turned, arrangements to have the general fund return as much as a dime of the more than $120 million taken out of the city’s water operations budget going back to 2008 has yet to occur.
Meanwhile, a cadre of Ontario residents, knowledgeable at what has occurred and equally conscious that Ontario had a nearly two-thirds of a billion budget in the current 2022-23 fiscal year, aware that its voters in November 2022 passed Measure Q, a one-cent sales tax override that is going to swell the city’s coffers by another $96 million per year and fully conscious that the city is going to see that budget grow to within shouting distance of a billion dollars in 2023-34 at $979 million, are beginning to agitate their fellow residents to stage protests and resistance to the city’s proposal to up its water rates this year along with increases in the city’s trash hauling rates and sewer rates.
In Fiscal Year 2021-22, there was a 3.5 percent increase in the city’s water rates over what was previously in place. In 2022-23 the water rates went up in Ontario by an average of 5 percent.
According to Ochoa, “The upcoming utility rate plan would increase the overall water/sewer/trash bill for a typical residential customer by 7 percent (about $8.35 per month) beginning in July 2023, and 6 percent (about $7.92 per month) beginning in July 2024.”
The Ontario City Council is scheduled to sign off on those increases at its July 18 meeting.
With its $979 million budget in the upcoming fiscal year, Ontario has revenue and will engage in spending that is well above twice that of the next wealthiest city in San Bernardino County, Victorville, and is actually closer to being three times as well endowed financially as Victorville, which in 2022-23 had a $333,533,046 budget.
The Sentinel asked Ochoa why it was that Ontario, which is so shipshape in terms of its finances, is now looking to institute yet another rate hike on water after having hit the city’s residents with the 5 percent increase last year and a 3.5 percent increase the year before that.
“It is important for enterprise funds (for example, water, sewer and integrated waste funds) to be self-supporting as business operations,” Ochoa said. “While it is allowable to have the city’s general fund support these operations, it is not advisable. Considering that the general fund houses most of the discretionary funding for traditional municipal services (public safety services, quality of life services, etc.), deferring appropriate rate increases to enterprise operations only exacerbates future problems when the public demands more general fund services. When that occurs and the enterprise funds must again stand on their own, then the rate increases needed to shore up those operations would be extreme.”
Ochoa suggest that the infusion of $96 million the city will see as a consequence of the passage of last year’s sales tax increase will be used in areas other than in restoring the city’s water system to the state it would be in if the money taken out of the water fund in the thirteen years from 2008 to 2021 had been used for maintenance, refurbishing and modernization.
“With respect to Measure Q, the value proposition made to the voters was that the city would expand services and make major investments in Ontario’s quality of life via strategic investments in community amenities,” Ochoa said. “Folks voted for Measure Q in order to leverage the sales tax power that Ontario has in the region in order to improve their community with additional services and amenities here at home. Indeed, our estimate is that more than half of Measure Q revenues will be generated by people who do not live in our town. I honestly don’t think that voters would have been motivated to vote yes if the value proposition keyed off of deferring or reducing utility rates that are today a solid value in the marketplace.”
In this way, Ochoa suggested it was not asking too much of Ontario’s residents and business owners to bear the onus at this time of not only the increase in water rates but its sewer and trash rates as well. At the same time he said, using the city’s vast revenue pool from other sources to fill in the water fund would be imprudent.
“The increases are indeed justified for water, sewer and integrated waste operations, maintenance, and capital investment,” he said. “The city may underwrite enterprise operations; however, it is not advisable or good management. In California today, fees and charges are so heavily regulated and differentiated from taxes, levies and assessments that not applying the appropriate charges for service delivery where they are allowed/justified/appropriate, essentially boxes out funding for other community-desired services.”
Ochoa said, “As for the integrated waste management component of the proposed rate increase, and as highlighted in our rate study prepared pursuant to state law in order to bring forth a proposed rate plan, all of the costs incurred by the city to operate the waste management system are represented. We haul our own trash (both residential and commercial); our costs for people, vehicles, fuel, compliance with state-mandated programs, etc., have increased. We utilize a material recovery facility owned and operated by Burrtec; their rates have increased. Our community’s residual trash is sent to a landfill owned and operated by Waste Management; their rates are increasing as well. The proposed integrated waste fees for service reflect all of these real-world costs incurred in doing business.”
Ochoa spoke in careful denial of any illegality with regard to the money that had been removed from the city’s water fund.
“The City of Ontario certainly does not ‘loot’ enterprise funds,” he said. “Additionally, any ‘borrowing’ of enterprise funds is for specific purposes, features specific terms that are compliant both with state law and generally accepted accounting principles, and does not impact day-to-day utility operations.
The city manager said the money taken out of the city’s water fund had been accounted for, but he did not offer any precise detail as to that money being paid back or the schedule for doing so.
“Enterprise operations are indeed accounted for in their own separate funds,” he said. “Use of enterprise revenues must be restricted to direct enterprise operations, less appropriate and allowable cost allocation pursuant to state law.”
While Ochoa made clear his disapproval of having the city’s general fund subsidize water operations, he made no mention of having the city’s water fund, which for 13 years subsidized general fund operations by well over $120 million, being recompensed.
Ochoa deflected suggestions that the well-heeled shot callers at City Hall were insensitive to the additional financial burden they were imposing on many of the residents in Ontario who have incomes that are a fraction of those of city employees or the income, pensions or independent wealth of the members of the city council.
“As a resident of Ontario, I am certainly empathetic of all members of our community,” Ochoa said. “I know the mayor and council are as well – so much so that prior to the introduction of this rate plan, they approved an updated low-income senior and low-income disabled subsidy ordinance that will take effect by the end of this month. This subsidy is estimated to abate most or all of the anticipated increase for qualifying households.”
-Mark Gutglueck