The California courts have released two opinions regarding cases of bad behavior at California water districts. They illustrate two problems that can occur in district governance.
First, the Court of Appeal for the Sixth Appellate District released an opinion in People v. Collins, denying an appeal by Steve Collins related to his felony conviction for conflicts of interest while serving as a director on the Monterey County Water Resources Agency. The trial court denied a motion to reduce his conviction from a felony to a misdemeanor, based on his failure to pay restitution to a client in a separate charge of theft by fraud. The appellate court upheld the decision by the trial court, holding that payment of restitution was a valid consideration. This likely concludes the latest legal proceedings against Mr. Collins, who was working as a paid consultant on a proposed seawater desalination project, while at the same time holding public office with the agency responsible for the project. It was a clear conflict of interest, and was one of the more egregious examples of bad behavior by public officials in recent years.
Second, the US District Court for the Eastern District of California released an order dismissing the case of Harrell v. Hornbrook Community Services District. The court held that Mr. Harrell, a former general manager of Hornbrook Community Services District who had filed numerous pro se complaints against the district over a period of three years, was abusing the court process through “purposeful overloading of the court with pleadings which take up more than warranted judicial attention, but which simultaneously demonstrate a desire to wage a war of attrition on the opposing parties.” The court dismissed the case with prejudice under Rules 12(b)(6) and 41(b), concluding that Mr. Harrell had shown no interest in having the court reach the merits of his complaints, but only sought to harass the district through the imposition of burdensome defense costs.
The cases represent two of many challenges for governance of local water districts. In the case of Mr. Collins, he was serving as a director on the governing board of an agency, while earning money as a consultant with projects being considered by that same board. His was a crime of an individual public official. In the case of Mr. Harrell, he was an ex-employee of a water district who engaged in a protracted legal battle for the purpose of harassment. Districts often face a small number of critics that attack the district on a regular basis for every action they take. Those critics require a large expenditure of management time and sometimes money, and can prevent a district from moving forward on its essential mission of providing clean, safe and reliable water supplies in an expeditious and efficient manner.
Luckily, these examples of bad behavior are not the norm. Most officials and district residents are sincerely motivated to serve the public interest, and most disputes concern the proper setting of goals and strategies.
In 2016, the California Legislature made moderate amendments to the Sustainable Groundwater Management Act (SGMA), which go into effect on January 1, 2017. You can find an annotated version of SGMA here, including all the newest changes. Early in 2017, look for a revised version of my earlier white paper on the significant groundwater law, including regulations adopted by the California Department of Water Resources (DWR) and the formation of groundwater sustainability agencies (GSAs) across the state.
Bills adopted in 2016 related to SGMA included:
In addition, several bills were rejected by the Legislature, including:
Fortunately, it is supposed to rain this week across much of California, so those dark clouds may contribute needed water supplies.
Since 2012, I have had the privilege of providing training to approximately 300 directors of California mutual water companies to satisfy the legal requirements of AB 54 (2011). Given continued interest in the topic, I will offer the course on two dates this year. Because mutual water companies are spread across the state, making travel to a central location impracticable, the training will be conducted by webinar on the following dates:
The training will be similar to previous years, updated for new developments in 2016. Like last year, the training is free to all directors of a mutual water company. Since there is no charge, I hope some directors will attend who have had the required training but could benefit from a refreshed memory and the 2016 updates.
If you are interested in attending the training or learning more, please call Pat Starkie at (512) 236-2231 or email her at email@example.com. I can also answer questions below. I look forward to meeting you.
I am happy to report that the California Legislature did no harm to mutual water companies in 2016. Given the past few sessions, that should be considered a positive outcome.
The only bill specifically naming mutual water companies that was passed by the Legislature, Senate Bill 1328, was vetoed by Governor Brown on September 24, 2016. That bill would have allowed the State Water Resources Control Board (SWRCB) to provide grants from the Greenhouse Gas Reduction Fund to implement drinking water, wastewater, water reuse and stormwater projects that were intended to decrease demand for fossil fuels needed to pump, transport and treat water. Named beneficiaries were public agencies, nonprofit organizations, public utilities and mutual water companies. It was good that mutuals and public utilities would have qualified for grant funding along with public agencies, and that the Legislature recognized the important role private water companies play in delivering water and wastewater services in California.
Governor Brown’s veto statement referenced a desire to prevent duplicative programs. He directed the Resources Agency to work with the SWRCB to include stormwater projects in the Urban Greening Program. Since SB 1328 was unlikely to provide a significant source of funds for private water companies, the veto can be considered neutral in its effect.
The Legislature did pass a number of bills which will affect the water supplies used by mutual water companies, but since those bills will impact all water organizations and users, I will address them in future posts.
The Internal Revenue Service has proposed changes to the rules by which it determines which entities may issue bonds for which the interest is exempt from federal income taxation. Issuance of tax-exempt bonds is by far the most common means of financing water and wastewater infrastructure in the United States, so the IRS proposal is significant for affected entities. The proposed rule would potentially affect irrigation or similar districts that supply water to a relatively small number of landowners, by excluding such districts from the definition of a “political subdivision.”
Under current IRS rules, an irrigation district or other governmental body is considered to be a political subdivision with the authority to issue tax-exempt bonds, if it is empowered to exercise at least one of the generally recognized sovereign powers. The proposed rule would continue that requirement and add new qualifications that the issuing entity have a governmental purpose and be governmentally controlled.
Under the current and proposed rules [§ 1.103-1(c)(2)], there are three recognized sovereign powers: eminent domain, police power and taxing power. Irrigation districts in the western United States generally possess both the eminent domain and taxing powers, but do not exercise any police powers, which are reserved to the state, counties and cities. Thus, irrigation districts normally qualify as political subdivisions under this requirement.
The proposed rule adds two new qualifications: that the entity issuing bonds have a governmental purpose and be governmentally controlled. Governmental purpose is determined by the purpose for which the entity was created, as set out in its enabling legislation, and the actual conduct of the entity [§ 1.103-1(c)(3)]. Supplying of water for irrigation and other purposes has been widely recognized as a public purpose, and irrigation districts are almost certain to satisfy the governmental purpose requirement under normal circumstances. In fact, the rule includes special districts that provide water, sewer, reclamation or irrigation services as examples of political subdivisions [§ 1.103-1(c)(1)].
The potential difficulty for relatively small irrigation districts arises from the requirement of governmental control [§ 1.103-1(c)(4)]. Under the proposed rule, this requirement is met if the issuing entity is controlled by a state or local governmental unit or an electorate. Control is defined as the power to direct significant actions of the entity and may be determined by three non-exclusive factors: (1) the power to approve or remove a majority of the governing body; (2) the power to elect a majority of the governing body; and (3) the power to approve or direct the significant uses of funds or assets of the entity in advance.
While irrigation districts are generally controlled by electors who own lands within the district, pursuant to normal state election laws, the proposed rule specifically excludes an electorate consisting of a “private faction” [§ 1.103-1(c)(4)(ii)(B)]. A private faction exists if control of the entity is exercised by the votes of an unreasonably small number of private persons. The rule expressly states that a controlling group of voters will always be unreasonably small if it contains three or fewer persons and will never constitute a private faction if it contains more than 10 persons. Groups of between four and 10 persons will be evaluated on the basis of all facts and circumstances. For purposes of counting voters, related parties are treated as a single person. This rule excluding private factions has the potential to impact smaller irrigation districts.
Determining the number of voters in an irrigation district and their degree of control would require a fact-specific analysis. However, there very likely exist small irrigation districts in the western United States that are controlled by a “private faction” as defined in the proposed IRS rule, and therefore would lose the ability to issue tax-exempt bonds. Smaller irrigation districts may include lands owned by a limited number of farmers, especially after application of the “related parties” rule. Compiling the votes of the largest landowners within a district may well result in control of the district by 10 or fewer persons, and the proposed rule should be concerning to those districts and their landowners.
The IRS is accepting comments on the proposed rule until May 23, 2016. The rule would not apply to bonds issued before the effective date of the changes (90 days after publication), and entities that were created prior to the effective date would be granted a three-year reprieve. If you are interested in further information on the proposed rule or how it might affect a particular irrigation district, please feel free to contact me.