With $120M+ Diversion Of H2O Funds Yet Unresolved, Ontario Ups Utility Rates

The Ontario City Council this week imposed on its constituents a 6.67 percent water rate hike despite outstanding questions over whether it has adequately addressed diversions of what is reported to be $127.6 million from the city’s water operating and capital improvement/facilities maintenance funds for the years running between 2008 and 2021. Over the last five weeks, as they were moving toward upping the amount of money Ontario residents and businesses will pay for the elixir of life, Ontario city officials have assiduously avoided explicitly addressing precisely how much of the money within the city’s water utility division was loaned or otherwise transferred to the city’s operating budget during the 13 years in question. This week, when confronted directly with requests to quantify the amount of water division money that was used to shore up the city’s general fund for well over a decade and how much of that money had been returned, despite Mayor Paul Leon’s promise Tuesday evening that City Hall would make that clarification, by press time today city officials have not yet done so.
The issue at hand is not entirely the interfund transfers, which while significant, are not unheard of. Rather, it is that city officials are unwilling to fully acknowledge or quantify them, particularly in a situation in which they are calling upon the city’s residents and the consumers of the water provided by the municipal utility department to essentially pay for the upkeep of the system that otherwise would have been provided for by the money which has been diverted.Cities keep separate and independent accounts for their general fund, defined as a city’s general operating account and its so-called special purpose funds. Special purpose funds include enterprise funds such as water, sewer or sanitation funds, which are used to operate the city’s utility divisions which provide, i.e., sell, services to the city’s residents. In California, under state law and the State Constitution as well as the California Municipal Utility District Act, cities are restricted from turning a profit on the provision of public utility services but must charge no more than the reasonable amount required to acquire the commodity such as water or electricity being delivered or provide the service such as sewage handling or trash disposal residents require along with the cost of maintaining the infrastructure, appurtenances and the system involved in the delivery of the service.
Modern accounting standards have developed such that local governments have the ability to and are obliged to keep all of its varying funds – from the general fund to the water fund to the sewer fund to the electrical utility fund to gas tax fund passed along by the state, to revenue enhancement funds obtained from voter-passed measures for specific purposes to state or federal grant funds to funds obtained from services rendered to the public to internal funds to asset seizure funds to money used for internal city services dedicated to special policing, special fire protection and suppression, the operation and maintenance of flood and storm protection, specialized recreational programs, special library, special museum and special cultural facility services, the maintenance of parks, the maintenance of parkways, the maintenance of open spaces or facilities in specific neighborhoods or districts supported by levies of fees exclusively applied in those subareas of the city, also know as community facilities districts – in separate and sequestered accounts. In Ontario, which owns and operates an international airport, the number of funds it oversees is substantially greater than virtually all other cities in San Bernardino County. The accounting and accounting mechanisms are therefore more sophisticated and more convoluted.
Interplay among and between a local government’s different funds are not absolutely prohibited and can take place with certain limitations that are meant to ensure the ultimate integrity of the funds. Loans from one fund to another can be made and sustained as long as the department of the city doing the loaning has the available financial resources within its fund or funds and does not have any immediate need to make use of that money and the department using the money needs the money and will have, or prospectively has, the ability in the future to pay the money back. Generally speaking, those loans are made at an interest rate that matches what is available from California’s Local Agency Investment Fund, a collective overseen by California’s state treasurer’s office which makes low-interest loans among local governmental agencies. By borrowing from itself at a bargain basement interest rate when it has a need for money, a local agency such as a city can spare itself substantial expense on financing costs, most notably interest rates. In making such loans, strict accounting procedures are supposed to be applied and ironclad agreements in place as to the terms and length of the borrowing, as well as the use to which the money that is loaned is to be used.
Thus, surplus money sitting in a city’s enterprise account, such as its water division funds kept for water division operations or water system expansion or maintenance, can be temporarily transferred to another city fund in time of need, pursuant to agreements being put in place ensuring the money is eventually to be paid back with interest. Challenges against a city doing so have been turned back by the California Supreme Court.
In the fall of 2007, following years of predatory lending targeting low-income homebuyers and accompanying freewheeling speculation in the real estate market by investors who entered the market without any substantial collateral along with excessive risk-taking by global financial institutions, what started as a temporary housing-purchase slowdown turned into a minor panic and then a major panic. A severe contraction in the United States housing market ensued, resulting in an across-the-board collapse in the value of mortgage-backed securities. There followed 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 some six-and-a-half 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 and/or 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. Initially, 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 the augmentations from the city’s water fund, Hughes maintained similar arrangements in the 2010-11, 2011-12, 2012-13 and 2013-14 budgets prepared under his watch, such that 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 accustomed to using water fund money as part of City Hall’s operating budget. Boling 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 an average 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 stagnation, 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 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, along with the modest 2.75 percent annual interest that was the Local Agency Investment Fund’s standard cost of money when capital was being transferred from fund to fund.
The lack of fiscal discipline in the Ontario bureaucracy that institutionalized under Hughes and flourished under Boling was by that point ingrained. Indeed, Ochoa, who was hired in October 2017 and arrived in Ontario in November 2017, had no idea at all raids on the water fund within the city he had found himself leading had been ongoing for just about 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.
To Ochoa, relatively newly arrived in Ontario, that reality was jarring. Ontario had at that point well above half of a billion dollars running through all of its municipal funds annually, putting it head and shoulders and half of its trunk financially above the next wealthiest city in San Bernardino County. For him, it was exceedingly difficult to understand how the city council could be so nonchalant about ignoring the basic financial requirement that transferences from one city fund to another, in particular a borrowing from a utility as crucial as the city’s water system, could go on for as long as it had, entailing approaching what was then $100 million in shortchanging of the city’s water utility, without the initiating of any effort to wind down the fund shifting, let alone refund the depletions.
Yet, at that point, relatively newly arrived in Ontario, 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. The reality was he was being provided with a salary of 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. In 2018-19, Ochoa chose not to deviate from the way the city council was long accustomed to operating as the leadership of San Bernardino County’s most financially accomplished city and he did not seek to ween Ontario from its slightly less than $10 million per year addiction to water fund diversions.
Nor in 2019 with the 2019-20 budget nor in 2020 with the 2020-21 budget, did Ochoa confront his political masters on the city council and strongly suggest that the city end 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 water to the city’s residents and businesses.
By 2021, pricked by his conscience and increasingly concerned that if City Hall were to continue rolling the dice with the city’s water division money that a convergence of delapidating pipelines, cisterns and contaminated wells, state and federal regulators environmental and financial regulators and plain bad luck could converge on him and Ontario where previously for Ontario and his predecessors as city manager good luck had prevailed, Ochoa let the mayor and city council know that the city could not go on misspending the city’s water division money. Summoning up his courage, he told them that 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. With Ochoa informing the council more than asking their permission to do so, and by action rather than through dialogue, with the 2021-22 budget, the diversion of water funds under Ochoa’s watch and at his direction came to an end, 13 years after it had begun.
While Ochoa succeeded in turning that page in Ontario’s history book, he has not made it through the next logical chapter, which is to make arrangements to have the general fund return the approximately $127.6 million that was diverted out of the water fund during the 13-year span accompanied by the fair amount of interest that should have accrued over those years as a consequence of those loans.
By his action, Ochoa cut a profile in courage, and he has paid the price. The year he made that move, as the city manager of Ontario, he was being paid $338,566.16 annually. In the 2020-21 fiscal year, the City of Ontario had a total of $553,761,426 running through all of its funds. In the current fiscal year, the City of Ontario has more than $979,000,000 coursing through all of its municipal funds, a near doubling of the amount of money the totality of city operations involved at the time that Ochoa took the water fund diversion tiger by the tail. Yet, the only adjustment made to Ochoa’s pay that has been made since that time are two three percent cost of living adjustments made to his basic salary which he is due under his contract. The council has gone into no fewer than five performance reviews of the city manager’s performance over the last two years – since he ended the water fund diversions – and have yet to provide him with a salary increase. That, the Sentinel is informed, is the city council’s expression of displeasure at the way in which Ochoa sought to impose fiscal discipline on the council with the discontinuation of the water fund diversions.
Moreover, continuing to withhold his raise until a decent interim passes following the controversy over the water rate increase is part of the council majority’s strategy to keep Ochoa from actuating the second element of the reform he initiated in 2021: the refunding of the $127.6 million with interest.
In 1996, California’s voters passed Proposition 218, which imposed a requirement that that voters approve all taxes and most charges levied on property owners throughout the state. In relatively short order, the proposition passed constitutional muster in the courts and was found to apply to fees or rates residents pay for services provided by cities. Nevertheless, the “taxpayer” or “ratepayer” protection found itself bogged down in the procedural process that grew up around it. Governmental officials succeeded in making it so that the approval took place not through a straight up-and-down approval of the tax or fee being applied but by means of a so-called protest vote. Thus, those who would be called upon to pay the fee would be given a signal by the governmental entity or agency or district seeking to up the fee or rates that the increase was being sought, whereupon the residents being called upon to bear the increase would be given a 30-day or 45-day window to lodge – in writing – a protest of the increase. Each protest letter would be counted as a vote against the rate increase. If a ratepayer failed to send in a protest letter, he or she was presumed to have voted in favor of the rate increase. In this way, given the level to which residents in California are ill-informed, apathetic, distracted or otherwise uninterested in such issues, since the passage of Proposition 218 there has never been a successful protest vote against any rate increase proposed in California. The closest any community came to a Proposition 218 blocking or a rate increase was what occurred in Yorba Linda in 2016, which technically was not the result of a Proposition 218 Protest vote but a referendum effort members of that community initiated after the Yorba Linda Water District increased its rates and sufficient number of votes against it failed to materialize. Thus, Proposition 218 rate increase protest votes everywhere in California are considered to be a formality that districts, agencies, cities and counties must go through when they are seeking to increase utility rates. Upon tallying the number of letters of protest received by an agency’s chief elections official and comparing them to the actual number of potential voters, the outcome of these protest elections are determined. Upon the agency’s chief election official having declared the results of the election, the board of the agency – a water district or fire district board of directors or city council or county board of supervisors – will then officially vote to impose the rate increase.
This week, at Tuesday night’s council meeting, City Clerk Sheila Mautz carried out the formality pertaining to the protest votes of the city’s residents relating to trash, sewer and water rate increases the city council was considering that evening.
In particular with regard to the water rates, Mautz said, “We received a total of 15 written protest letters regarding the water rates. A majority protest does not exist for this proposed water rate.”
At the meeting, a handful of residents, however, had raised questions about the diversion of water funds to other uses over the years. Despite an abundance of inquires that evening relating to those diversions, Mayor Paul Leon, while inviting comments, stated, “To facilitate the discussion, any questions from the speakers will not be answered during the public hearing. So, it won’t be a time to answer that question. You have your three minutes to make a statement.”
With the issue put square before the council that evening, which was there in four-fifths strength with, in addition to Mayor Leon, councilmen Alan Wapner, Jim Bowman and Ruben Valencia present and Councilwoman Debra Dorst-Porada absent, Leon invited Ochoa to comment on the issue.
Ochoa spoke gingerly.
“As it pertains to the city recovering its overhead costs,” the city manager said, “cities that operate utilities like OMUC [the Ontario Municipal Utility Company] have the ability to recover their costs and they are required to document what that process is by way of a cost allocation plan and a rate study, which we have, which we have had.”
With three-fourths of the ruling council majority city on the dais with him, Ochoa then finessed the pending question of whether Ontario residents and its utility customers had been deprived of $127.6 million worth of improvements and maintenance to the city’s water system and facilities because of fund diversions to other city departments and uses, such as employee salaries, benefits and pensions during the years 2008 to 2021.
“As time has gone on, especially in California, as the ballot box activism of Prop[osition] 218 and Prop[osition] 26 and other types of direct democracy ballot measures have governed, there has been a very close refinement as to what can be recovered by a city via its utility,” he said. “As those standards have changed based on what experts have to say, what courts have to say, so too has the city changed its approach with respect to the cost allocation plan and the rate study, which I would invite anyone who has trouble falling to sleep to pull the rate study that Ratellis did, the cost allocation plan that has been done and be able to peruse them because they reflect the situation that we have before us. The idea of borrowing or any other analogy that might be used, I think is incorrect. The city recovers its costs. The city did recover the costs. The city will continue to recover its costs and we will comply with the law. That is what we are doing with the last rate plan and what we are doing with this rate plan most definitely.”
Following Tuesday’s meeting, the Sentinel sought from the city a declaration or clarification as to whether the city – meaning its general fund or other municipal funds – borrowed any money from the city’s water fund; how much money the city borrowed from the water fund if that borrowing indeed took place; how much money the city borrowed from the water fund in total; and when, that is, what years, the city borrowed the money from the water fund. The Sentinel thereafter asked for a quantification of how much the city borrowed from the water fund in 2008-2009, 2009-2010, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16, 2016-17, 2017-18, 2018-19, 2019-20 and 2020-2021.
Further, the Sentinel asked if the city returned in the last several years any of the money it borrowed from the water fund and for it to quantify how much of the water fund money that the city had borrowed in each fiscal year running 2008-2009, 2009-2010, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16, 2016-17, 2017-18, 2018-19, 2019-20 and 2020-2021 had been returned.
The Sentinel made those inquiries in an email sent to Ochoa and electronically carbon copied to the mayor and all members of the city council and the city attorney as well as in an email sent to City Treasurer James Milhiser which was both sent and hand delivered to him at his residence, along with a text message to Mayor Paul Leon.
Those Sentinel inquiries prompted no response by press time.
The Sentinel made a further attempt to speak directly with Scott Burton, the City of Ontario’s utilities general manager, but was diverted to Dennice Raygoza, who initially said she would be able to answer most questions about the city’s water capital funds. Raygoza, however, told the Sentinel she did not have any specific knowledge about loans made from the city’s water fund to other municipal funds.
The Sentinel placed eight separate phone calls to Armen Harkalyan, the executive director of the City of Ontario’s finance department but was unable to reach him this week.
A highly-placed Ontario city employee, with knowledge of a wide range of city financials, told the Sentinel that the $127.6 million figure is roughly accurate, but omits some minor transfers of funds that took place at several junctures over the years. The money, the source said, has not been refunded.
Asked why city officials are stonewalling the Sentinel’s inquiries with regard to the $127.6 million and characterizing earlier Sentinel reporting on the issue as inaccurate, the employee said, “They’re tripping you up when you use the word borrowing. It’s a matter of semantics. Terms like borrowed and loaned aren’t operative. These are interfund transfers.”
There are two reasons the money will not be paid back, the Sentinel was told. First, doing so would obviate the rationale for the just passed rate increase. Second, at this point, based on the most conservative interest accrual formula based upon 2.75 percent annual interest rate over the life of the loans, running 15 years from 2008-2009, 14 years from 2009-2010, 13 years from 2010-11, 12 years from 2011-12, 11 years from 2012-13, 10 years from 2013-14, nine years from 2014-15, eight years from 2015-16, seven years from 2016-17, six years from 2017-18, five years 2018-19, four years from 2019-20 and three years 2020-2021, the debt has reached $168,437,597.

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