Some residents and local officials are questioning Ontario’s sudden shift toward stinginess with regard to a water recycling and storage project that a regional agency says is ready to transition from the drawing board into a reality.
Ontario’s tightfistedness is remarkable, it is being suggested, because of Ontario’s past diversion of money from its water utility funds to other municipal undertakings, and that capital has never been refunded. The $127.6 million taken out of the city’s water enterprise fund over a period of 13 years, subject to the interest the city should have been paying on that borrowed money now totals nearly $177.83 million, which would be more than sufficient to cover the city’s share of the cost of the Chino Basin Project, those city critics maintain.
The Chino Basin Project, a joint undertaking by the Chino Basin Watermaster and the Inland Empire Utilities Agency, would entail the construction of a modern water purification facility that would process on average 15,000 acre-feet (nearly 4.89 billion gallons) of wastewater into water and the installation of pipes along with wellhead improvements to allow that water to be injected and stored in the Chino Groundwater Basin. Construction on the project would begin in 2026 and operations of the treatment facility would be phased in beginning in 2031. This recharging of the local water table, which would boost the groundwater level by between 20 to 25 percent, would obviate the need of local water agencies, companies and cities in western San Bernardino County – the Cucamonga Valley Water District in Rancho Cucamonga, the Fontana Water Co., the Monte Vista Water District in Montclair, the San Antonio Water Co. in Upland, the West Valley Water District in Rialto, the City of Ontario, the City of Chino and the City of Chino Hills – to obtain water from the State Water Project that originates in north-central and northern California.
An estimate of the cost of the project, when it was first proposed in 2010, ran between $50 million to $150 million at that time. More recently, however, the predicted cost has escalated, perhaps to double or more of the initial estimate. The Chino Basin Watermaster and the Inland Empire Utilities Agency have suggested that up to $215 million of the project cost could be defrayed through applications to the State of California for Proposition 1 funding.
Proposition 1, the Water Quality, Supply and Infrastructure Improvement Act of 2014 passed by the voters that year, authorized the issuance of $7.545 billion in bonds for financing various water projects throughout California, including $2.7 billion dedicated to water storage projects.
Officials with the City of Ontario are balking at proceeding with the project, asserting that uncertainties about the cost make them uncomfortable. They point out that in terms of sheer numbers, the region can simply continue to import water from the California Water Project, which is currently available for between $900 to $1,600 per acre-foot.
According to the Inland Empire Utilities Agency, however, the State of California cannot guarantee far into the future the availability of water from the California Water Project, and state officials are encouraging all local water agencies and companies to pursue water conservation, water re-use and water recycling. Within the next ten to twenty years, it is not inconceivable that the price of water will increase to well above $4,000 per acre-foot.
Still others, in particular some Ontario residents with long memories, believe the City of Ontario should and could pay its share of the cost of the Chino Basin Project.
Ontario residents are provided water through the city’s water utility division, what functions as the Ontario Municipal Utility Company.
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 sewer service residents require along with the cost of maintaining the infrastructure, appurtenances and the system involved in the delivery of the service.
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.
Modern accounting standards have developed such that local governments have the ability to and are obliged to keep all of its varying funds in separate and sequestered accounts.
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, 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.
Over the next ten years, Ontario had three turnovers in city managers. Throughout that time, each successive year, the borrowing from the water fund continued, almost as if the practice was institutionalized.
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, but it was high time, as had been intended by the municipal management team that had begun the borrowing in 2008, that the flow of money be reversed such that the city’s general fund would begin 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.
Ontario’s 2008-09, 2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16, 2016-17, 2017-18, 2018-19, 2019-20 and 2020-21 budgets were all shored up with borrowed water division money.
In the 2021-22 fiscal year, the diversion of money from Ontario’s water fund into the general fund came to an end, 13 years after it had begun.
While Ontario turned a page by ending the borrowing, it 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.
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 five years from 2020-2021, the debt has reached $177,829,045.77.
Meanwhile, Ontario officials are loath to acknowledge at this point that the borrowing took place, let alone that the money has not been paid back, either with or without interest. At the same time, they are insistent that paying for the city’s share of the Chino Basin Project would be an unwise use of the city’s water utility capital project funds.