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HomeMy WebLinkAbout2017/06/20 - Item A - Written CommunicationISA With a major public relations campaign throughout Southern California, the San Diego County Water Authority (SDCWA) is mischaracterizing Metropolitan's financial practices during the recent drought years as charging too much for water and spending too much on investments. Thanks to water Metropolitan had in reserve going into the drought, Southern California withstood the historic dry cycle without economic hardship and on sound financial footing. • Metropolitan sets rates every two years based on an • Member agencies can increase their demands on exhaustive study of future costs. Metropolitan during droughts as their own supplies • Rates are based on an average of many potential become limited. weather conditions. • Metropolitan was able to meet the increased demand • Actual sales can vary significantly based on actual thanks to water held in the District's storage network. weather conditions. 0 The result was higher-than-expected sales, not water • This is customary and part of Metropolitan's role as a "overcharges." supplemental supplier of Southland water. • Unrelated to the drought, strategically important lands on the Colorado River and Sacramento - San Joaquin Delta became available. • Metropolitan's Board of Directors decided to purchase these lands as valuable future assets. • Related to the drought, Governor Brown declared a statewide emergency in April 2015. • Metropolitan responded with the largest turf removal program in the nation, transforming thousands of landscapes and locking in cost- effective water savings for decades to come. • Metropolitan purchased these investments with cash from its funds. • In an unrelated matter, Metropolitan has been required to set aside disputed payments until a lawsuit over rates with SDCWA is resolved. • While the land acquisitions resulted in Metropolitan issuing additional bonds, the overall level of debt for our size is manageable and much lower than that of SDCWA. • Metropolitan maintains some of the highest Wall Street credit ratings of any government agency in California. • With the wet winter now allowing Metropolitan to replenish its water reserves, the District will be able to store valuable new water supplies for future droughts. THE METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA March 2017 SDCWA in 2017 began the unusual step of writing letters to local officials outside of its service area. The letters contain misrepresentations that question Metropolitan investments and financial practices. SDCWA has hired a public relations firm for approximately $50,000 a month, apparently to conduct public relations critical of Metropolitan. The following summarizes the misrepresentations and Metropolitan's track record on the subject. • Metropolitan over the years has always set its rates to recover anticipated costs, including anticipated sales of our imported water supplies. • During the recent drought years, member agencies purchased far more supplies from Metropolitan than anticipated because their own supplies became limited. • Metropolitan met those higher demands, including all requests from SDCWA. • SDCWA through a lawsuit is seeking to shift costs for its own Colorado River water acquisition onto MWD's 25 other member agencies over the coming years, a plan it is not mentioning in its public relations campaign in other communities. • Metropolitan seized on three major unanticipated opportunities during the drought. • To support the reliability of imported supplies from the Colorado River, Metropolitan purchased land in the Palo Verde Valley for $264 million. • SDCWA voted in favor of this "unplanned" investment. • To help accelerate a shift away from lawns to California Friendly® landscapes, Metropolitan funded the nation's largest turf removal program. • The cost of this water savings is estimated to be far less than developing new water. • Metropolitan purchased four Delta islands for multiple potential values consistent with the co- equal goals of a restored Sacramento -San Joaquin Delta and a reliable water supply from the State Water Project. • The lands are potentially vital for the proposed California WaterFix project, habitat restoration or other possible uses. • Metropolitan has a manageable debt load that has actually declined in recent years compared to overall assets. • SDCWA for its size has a much greater debt load than Metropolitan. • Metropolitan maintains high credit ratings in part because of the very same water rates and sound financial practices criticized by San Diego, THE METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA I4eryl A Son Diego County WaterAuthority MWD Statements and Water Authority Response MWD Statement I Water Authority Response "We [MWD] are your primary water False. provider." In 2016, MWD provided 41 percent of all water used in San Meena Westford at San Diego County Board of Diego County. That number will decline to 21 percent in Supervisors, March 22, 2017. 2020, and 13 percent in 2035. "We [MWD] typically deliver more than 80 Misleading. percent of all the water that comes into Son Diego." MWD continues to claim that San Diego's independent supply of Colorado River water, which MWD wheels for San Meena Westford at San Diego County Board of Diego under the parties' Exchange Agreement, is a "sale" of Supervisors, March 22, 2017. MWD water. This is false; the trial court has already ruled in favor of the Water Authority and against MWD on this point in the rate litigation. MWD transports our IID supplies which represent nearly 40% of our total supply. "Metropolitan sets rates every two years Misleading. based on an exhaustive study of future costs." It is impossible to know how MWD sets its rates because MWD claims that its financial planning model, which it Metropolitan's A Tradition of Sound Spending. uses to set its rates, is a trade secret. The Water Authority has been forced to file a Public Records Act lawsuit in order to obtain this information. No member of the public or even MWD's own board of directors knows how MWD has actually allocated its costs and set its rates, without access to this information. MWD's public statements of its rates and charges, including its defined "Cost of Service" reports, do not explain the specifics of MWD's cost allocations or rate setting, or demonstrate that MWD's rates are consistent with legitimate cost allocations. "Metropolitan engages in long-range Misleading. financial forecasting." MWD's 13=page 10 -year rate forecast included in its budget Meena Westford at Water Authority's Administration document is not, and is no substitute for, a long range and Finance Committee, March 23, 2017. finance plan (LRFP). A LRFP would properly be designed as a planning document that MWD and its member agencies could use as the basis of future capital and operating decisions. If MWD had such a LRFP it would not be so prone to making major unplanned expenditures or unplanned borrowing. MWD last updated its LRFP in 2004; it was subsequently unable to get its member agencies to agree on a LRFP to pay for MWD's projects and abandoned the effort. According to the GFOA Long -Term Financial Planning Best Practice: LRFP combines financial forecasting with strategizing; it is a highly collaborative process that considers future scenarios and help navigate challenges; elements of a plan include a time horizon, scope, frequency, content and visibility. MWD's long-range financial 6 San Diego County Water Authority MWD Statemdnt Water Authority Response forecasting does not strategically plan for future challenges in a collaborative process, and lacks key elements of long range financial planning. "We look at every facet of our budget and False. make careful, calibrated detailed forecasts of where MWD finances are heading for the This claim cannot possibly be reconciled with MWD's record decade ahead." of unplanned spending in excess of $1.2 billion. The "opportunities" to spend $450 million on conservation and Meena Westford at Water Authority's Administration turf removal and $175 million on delta islands certainly and Finance Committee, March 23, 2017. existed at the time MWD's budget was adopted, however, these enormous expenditures were not included in MWD's budget nor the 10 -year rate forecast that MWD wrongly describes as a "long range finance plan." "When the drought was at its worst, we met Misleading. all regional deliveries..." "Metropolitan was able to meet the increased demand thanks to This statement fails to note that MWD was forced to draw water held in the Districts storage network... down more than 1.1 MAF of water from its storage in 2014, resulting in a 15% supply cutback in 2015. The Water Meena Westford at the San Diego County Board of Authority was able to use its own supply investments to Supervisors on March 22, 2017. reduce the severity of MWD's cutback to 1% of the Water Authority's total supply. "...the result was higher than expected sales, False. not water "overcharges." Rather than basing its budget on its member agencies' water purchase projections and actual available data and Metropolitan's A Tradition of Sounding Spending. information, MWD bases its budget and rates on sales assumptions that MWD deliberately designed to result in the over -collection of revenue in seven out of 10 years. (Chief Financial Officer Gary Breaux at MWD's April 8, 2013 F&I Committee) "We look at State Water Contract costs long False. term based on detailed information provided by the state as well as our own forecasts of MWD fails to consider actual conditions when setting its budget power costs." and rates. For example, during the recent drought, MWD refused to adjust its budgeted State Water Project costs — Meena Westford at Water Authority's Administration MWD's MWD's single largest cost —to reflect the prolonged dry and Finance Committee, March 23, 2017. and resulting unlikelihood that the State Water Project's allocation would be 50%. As a result, MWD set its rates to collect enough revenue to cover the costs of receiving a 50% State Water Project allocation, even though MWD did not expect to receive anywhere near that amount of water. When MWD did not receive a 50% allocation, and thus did not incur the costs associated with a larger allocation, it charged rates much higher than necessary to cover its costs and thus significantly overcollected. MWD should have set rates designed to recover its actual, anticipated, and much lower costs of receiving the 20% allocation the SWP actually provided. San Diego County Water Authority MWD Statement Water Authority Response "Metropolitan purchased these investments False. with cash from its funds." Combined, MWD's purchase of delta islands, Palo Verde Metropolitan's A Tradition of Sounding Spending. Irrigation District land and conservation program funding largely for turf removal, totaled about $870 million. MWD paid these costs by drawing down its financial reserves and by using revenues budgeted to cover other MWD capital expenses. Further, in order to keep MWD's cash reserves from falling below the minimum amount required by MWD's Administrative Code, MWD authorized the issuance of up to $S96 million in debt. "SDCWA through a lawsuit is seeking to shift False. costs for its own Colorado River water acquisition onto MWD's 25 other member In fact, the exact opposite is true. A neutral San Francisco agencies over the coming years, a plan it is Superior Court Judge has already ruled against MWD on this not mentioning in its public relations point, finding that its rates are illegal under the common campaign in other communities." law, statutory law and the California Constitution, because they allocate costs incorrectly to San Diego. It is MWD that improperly assigned costs, not the Water Authority. Metropolitan's A Tradition of Sounding Spending. "Standard practice" or "standard fashion" False. dictates that all financial graphics use the number zero in the "x -y axis." MWD provided no citation to any applicable accounting standard to support the assertion of such a "standard Meena Westford at Water Authority's Imported Water Practice." Professional training and basic common sense Committee, March 23, 2017. dictates that any financial graphic be designed to tell the truth (rather than obscure it) and clearly illustrate the point at issue. The use of a zero axis in the context of such large numbers would tend to obfuscate rather than focus attention on the point at issue. On sales, the [Water Authority] staff graphic False. would suggest at a glance that we are heading to zero sales. The staff graphic does not "suggest" that MWD is heading to zero sales, either "at a glance" or otherwise. MWD Meena Westford at Water Authority's Imported Water statement appears designed to deflect the reader from the Committee, March 23, 2017 real issue addressed by the chart: MWD sales have been declining and continue to decline to a material extent. "Water Authority's own rates and charges for Misleading. treated water are about 60 percent higher than that of Metropolitan, and the Water The MWD treatment charge is $313 per acre-foot while the Authority's rates and charges for untreated Water Authority's treatment charge is $290 per acre-foot. water are about 90 percent higher than that Over the last 10 -year period from CY 2008 to CY 2017 MWD of Metropolitan." rate increases have been 7.7% for untreated and 7.9% for treated water. Over the same time period, the Water Authority's rate increases for untreated were 8.9% and 8.S% Meena Westford at Water Authority's Imported Water for treated water. Committee, March 23, 2017 6 San Diego County Water Authority MWD Statement Water Authority Response "SDCWA for its size has a much greater debt Misleading. load than Metropolitan." A lower debt load, by itself, does not necessarily equate to Metropolitan's A Tradition of Sounding Spending. better financial position. The Water Authority's higher debt load (FY 2016/2017 Debt Burden — 18.9 %) is appropriate and consistent with best practices given its CIP Program which is designed to produce and is producing a highly reliable water supply for San Diego. MWD's debt load is slightly lower at 16.8%.