SLVWD Board Meeting Summary
March 4, 2021
Mark Dolson
Highlights:
District will borrow $15 million for 20 years at a 2.40% interest rate.
District Manager given two months to prepare overview of consolidation proposal.
Grand Jury response approved.
No action on revised committee appointments.
Next Board meeting is at 6:30 PM on March 11.
Preliminaries:
There were no actions to report from closed session. Director Smolley called attention to a Santa Cruz City petition to change their water rights. Counsel Nichols said there will still be opportunities to pursue this further after the March 12th deadline for filing protests. This will be agendized for a future meeting.
Both Jim Mosher and Larry Ford offered public input on this topic. Jim urged the Board and Staff to look at this issue closely. He said the proposed changes will hopefully be beneficial to the entire region, but we need to understand any implications specifically for the San Lorenzo Valley (e.g., involving the District’s ability to draw water from Fall Creek or Loch Lomond). He said he didn’t understand the implications of the March 12th deadline for filing protests. He also suggested that this presented a potential opportunity to collaborate with Scotts Valley. Larry added that he too was surprised to have this issue suddenly come to the public’s attention; he was pleased to hear that Staff was already aware of it and already working on it.
Director Fultz asked if the Board could schedule a special meeting in the next week as he thought it would be worthwhile for the Board and the public to have a discussion prior to the filing. President Mahood said she would check with District Manager Rick Rogers and Legal Counsel Gina Nicholls about this.
Unfinished Business
Loan Analysis
Finance Manager Stephanie Hill introduced some paperwork in need of Board approval. This was the product of multiple previous Board discussions culminating in agreement that the District should borrow $15 million for 20 years at a 2.40% interest rate from CoBank. This money will be used for fire-related infrastructure repair, for deferred infrastructure improvements, and to replenish the cash reserve fund. (Mrunal Shah of the consulting law firm Best, Best, & Krieger was available to answer questions, but none were directed toward her.)
Director Smolley asked if the required statements and audits exceed what the District typically does and whether the District is prepared to set up the required project fund. Stephanie said the fund is already set up; the loan requires a little more quarterly reporting than other loans, but this will be integrated into the quarterly financial report with minimal impact. Director Smolley also asked about tracking maintenance the loan assumes the District will perform on installed equipment. He wanted to know if the District has a preventive maintenance schedule that it will simply add to. Rick Rogers said the District does have a computerized maintenance management schedule but it is not complete, as not all of this maintenance has been funded (e.g., tank coating). The loan terms will require the District to be more rigorous, but this is something the District is working on.
Director Fultz sought clarification on multiple details. He asked what the District’s new forecasted debt coverage ratio will be. Stephanie said she could provide a precise updated figure offline, but it should still be very healthy, probably around 2.5 after September, 2021. Director Fultz also asked about the effective prepayment possibility (without a huge penalty). Stephanie said the District secured the lower rate that allows it to pay off the loan at any time that interest rates are higher; there is a penalty if the rates are lower.
In addition, Director Fultz read a prepared statement elaborating on his support for the loan in question. He noted that construction costs could (and likely would) exceed the current estimates, and the District’s $3 million reserve fund has been effectively exhausted. The Board needs to ensure that reserve funds are always available and that excess construction costs can be managed without an additional financial penalty. He noted that the District might ultimately be reimbursed for more than the estimated 75% of fire-related costs, but that the Board cannot assume this. It is therefore fiscally prudent to borrow more than the minimum required amount. The District will earn interest on the excess funds and will pay only $4 million in interest over 20 years. He expressed hope that the District will take out an additional loan in 12 to 18 months.
There was no public comment. The resolution approving the installment purchasing agreement was unanimously approved.
Exploration of Possible Consolidation with Scotts Valley Water District
The goal of this agenda item was to decide on next steps with regard to further exploration of the possible water district consolidation first introduced at the February 4th Board meeting. Rick Rogers read a memo in which Staff recommended moving forward with exploration of the consolidation possibility. Specifically, he recommended that the Board establish an Ad Hoc committee which would be tasked with gathering more information (including from the public) and developing an RFP for a consultant to conduct a feasibility study (to be completed perhaps within the next six months) assessing potential benefits and pitfalls. He emphasized that establishing the committee would not commit the District to any new expenditures. With regard to widely voiced community concerns that 2021 is a particularly ill-advised time to undertake such an assessment, Rick offered three counter arguments: (1) “there is never a good time,” (2) the opportunity to consolidate may not last long (though he did not explain why this might be), and (3) the current timing takes advantage of anticipated retirements of senior staff (though he did not specify who he was referring to).
Director Henry said her initial “kneejerk” reaction to the consolidation idea was negative, but this was based purely on emotion. She said she now supported a feasibility study because she needed to be able to base her decision on facts. She echoed Rick Rogers’ suggestion that there will never be a “good time” to consider a consolidation, and she worried that Scotts Valley might instead choose to merge with someone else. In her view, the consolidation would make SLVWD larger and stronger.
Director Smolley asked if Rick was recommending that the Board authorize both establishing a committee and seeking a consultant. Rick said yes. He said the committee first needed to put together the RFP. He also said time was needed to incorporate community input. Director Smolley pointed out that Rick’s “there is never a good time” response failed to address the assertion that this is a uniquely bad time. He asked about at least waiting until pandemic restrictions on public meetings are removed. Rick stated that his proposed activities would place only a minimal burden on Staff and that video meetings are actually superior to traditional public meetings. Director Smolley asked how the District anticipated pursuing outreach under the current pandemic restrictions other than via Zoom. Rick responded that all local newspapers have provided coverage and that social media has also been active, demonstrating that “the information will get out.”
Director Smolley also asked what the impact on the District would be if the current restrictions on water transfers (which can occur only under emergency conditions) were lifted. Rick said the low-hanging fruit in the fiscal assessment of the consolidation involved elimination of a District Manager and an administration facility. The possible sale of water would be part of a more in-depth assessment. This has long been a topic of discussion, and SLVWD currently has about 1000 customers in Scotts Valley. The District has also been working on conjunctive use and permits for some time. Rick’s feeling was that the RFP would need to address this so that the feasibility study could determine what the District can do. He also said that getting water from Loch Lomond into the District’s south system is attractive.
Director To asked if Scotts Valley would undertake a parallel assessment study and whether it would use the same contractor. Rick said he was envisioning a single SLVWD feasibility study that Scotts Valley would review and help to fund. He also noted that the feasibility study for the recent Aptos/Central Fire Districts consolidation cost a total of $42,784, with the two fire districts and LAFCO each paying a third of the cost.
There was extensive public comment on this topic with over 50 members of the public in attendance and over a third of these people providing input.
Lee Allen Sanders recommended that the consolidation topic be tabled. He suggested that Rick Rogers could be seen as a lame duck who could make controversial decisions without fear of consequence.
Elaine Fresco recommended waiting rather than proceeding immediately. She asked for more clarity on how the Ad Hoc committee members would be chosen and how they would do their work independent of the consultant. Rick Rogers responded but did not provide any specifics.
The next speaker asked why Scotts Valley would want to consolidate. He suggested that they need water to keep pace with growth. He questioned how this would benefit the SLV.
Beth Thomas said she didn’t have a clear position on the consolidation, but she had a lot of concern about the timing. She still hadn't heard why it is so important to move quickly. Staff has repeatedly reported that they lack bandwidth to take on any additional tasks or projects. This is not a normal bad time; there are multiple concurrent issues. Unless there is a compelling reason to do it now, this seems like the worst time.
Alaina Laing spoke in favor of consolidation, saying a watershed is a connected ecosystem, and there is a great benefit to managing it as a whole. A merger would also be more financially efficient.
Beth Hollenbeck reiterated that the CZU Fire plus the pandemic constitute an unprecedented combination of duress. Also, Felton has a huge right to be involved and to have a say in what happens to its water because it is still paying for the bond used to buy out California American Water. Lastly, she asked whether LAFCO has to be involved and whether Fish and Wildlife will be involved. Rick Rogers replied that LAFCO would eventually have to be involved and that CA Fish and Wildlife would most likely eventually comment. With respect to Felton’s investment in local water, he said that consolidation would produce considerable savings which would be passed on to customers. He added, though, that he is personally on the fence until the District receives a detailed engineering report and a detailed feasibility report and lets its customers review this information.
Jim Mosher urged the Board to table this proposal. He said this is such an extraordinary time for the District and its customers, and this proposal will take an enormous amount of time not only for the Board and the Staff but for the community. The proposed consolidation would become the number one issue for ratepayers. People are very concerned about this; it will distract from efforts regarding fire preparation, debris flow, and infrastructure, and it will generate a lot of conflict. He urged the District to continue exploring collaboration with Scotts Valley but said he was very concerned about how the District will communicate with ratepayers about a potential consolidation. The District has a poor track record in this area. Most of the citizen concerns are not about financial impact. How will these be engaged?
Pete Norton said District Managers have evidently been discussing this for some time, so they must have some clearer idea of the potential outcome. The Managers should come up with a list (a couple of pages) of possible benefits and pitfalls before moving forward. He also asked whether (and how) the Ad Hoc committee was going to perform any useful investigation or whether it was simply being charged with developing an RFP for a consultant.
Jill Kenny argued that we are all in a heightened state of stress, and she urged the District to defer any further consolidation discussion. She said SLV would have no control over Scotts Valley which is known to be growing, and she had multiple other questions.
Shar said he was not a fan of consolidation, and this is the worst possible time to be considering this. He felt that the District was running with an idea that was just presented out of the blue.
Larry Ford said he thought the consolidation idea was interesting, but he didn’t think now is the time to pursue this. He asked whether the two districts really need to consolidate to get the benefits that are being conceived and wondered what other approaches might achieve this. A more pressing concern for him was that the next fire season could be just as bad as the last one.
Lorraine Palmer asked that Rick share his back-of-the-envelope calculation and information about retirements with the public now. She added that Scotts Valley is a pro-development environment and asked how the consolidated district would withhold water. Lastly, she said this is not just a bad time but the worst time. How will the District reach out to families that aren’t even here? The District doesn’t do well with normal outreach. [Rick Rogers subsequently clarified that the District lost only 120 connections to the CZU Fire.]
Joe Serrano, Executive Officer for LAFCO, said this is an opportunity for residents and the Board to gather information. LAFCO can help, but it doesn't have to. He argued that trying times are actually when agencies band together and that this is happening across the state. He added that if there are other options, the feasibility study should identify these. Facts will help everyone to make an assessment.
Tom Purdy said he was a little skeptical of the benefits, and he feared the potential drain on SLV water resources from a growing community in Scotts Valley. He said he was OK with a feasibility study, but it needs to be impartial, and it will be really important to get the community involved. Otherwise, a lot of people won't buy in. He also wasn’t sure why this needs to be done now.
Former Director Rick Moran said he has been attending Santa Margarita Groundwater Agency (SMGWA) meetings (with Scotts Valley and the City of Santa Cruz) on the fourth Thursday of every month for the past eighteen months. So far, SMGWA has only agreed on definitions and goals. Coming up is funding for various projects that need to be done. He argued that until we can demonstrate that we can work together to develop fair arrangements, it is premature to explore consolidation.
Beth Dyer said she thought the District was wise to consider a feasibility study but that it would likely cost far more than the $40,000 example of the fire districts. Also, this is a poor time to take on additional work.
Cynthia Dzendzel suggested that the consultant would only come up with information provided by Staff. She thought the Ad Hoc committee could be a good idea if it does its own research and has access to information from both water districts. She added that Scotts Valley residents think we are anxious to join with them because of our financial difficulty.
The final public speaker said one of her major concerns is that any proposal must be done as transparently as possible with the public, and this is currently very difficult to achieve. There needs to be a lot more outreach to stakeholders, and displacement and distraction from the CZU Fire will complicate this.
Director Smolley sought further clarification from Rick Rogers on several questions raised by the public. First, why do this now? Rick said, “Scotts Valley knocked at our door, and I felt it wasn’t my decision to put it off. Yes, some times are better than others, but I think Zoom is a great way to get information out. I understand people’s concerns, but we owe it to our ratepayers to at least get some questions answered.” Mark next asked, “What are the benefits? Can Rick and Piret provide two pages of potential benefits and downsides by one month from now?” Rick said he could do this, but he argued that the community wants to hear from a neutral party. He said the District is looking at $2.5 to $3 million dollars for a new admin building, and this would be a big savings. He also said that selling Loch Lomond water to Scotts Valley would generate revenue and keep the water in the aquifer. He argued that the District should keep moving in this direction.
Director Fultz said this is not purely a financial decision, and nothing he had heard this evening had changed his mind from the previous Board meeting. He then read a lengthy prepared statement which included the following points: Director Fultz remained deeply skeptical about the cost-reduction projections, as he felt it would be harder to control costs at a larger agency. He was puzzled that Scotts Valley is forecasting only 0.26% per year in growth of connections over the next 10 years. This seemed low to him, but he said he would be happy to sell them SLVWD’s surplus water. He was also concerned that Scotts Valley, as a fast-growth area, would cause the District’s focus to rapidly shift toward serving Scotts Valley’s agenda. He agreed that more analysis was needed, but he didn’t agree with the Staff recommendation. He argued that the District’s plate is currently full with very strategically important projects. His position was that we already know consolidation is feasible, but we haven’t yet seen a compelling case for it. He endorsed Director Smolley’s recommendation that the two District Managers prepare a two-page term sheet, and he further recommended that they include a section on governance and quantitative financial information on savings, along with alternatives to consolidation such as water sharing. He suggested that this could be accomplished in two months, and said he saw no value to inserting a consultant into the process. In addition, he recommended that there be an early affirmative community voting process (as opposed to the post-LAFCO opportunity to object). Lastly, he suggested that the term sheet also include a Strengths, Weaknesses, Opportunities, and Threats assessment which would include the possibility that Scotts Valley might consolidate with a different district. He doubted that Scotts Valley would be well-served by consolidating with Santa Cruz. In his view, a transparent term sheet would put to rest all the speculation that has proliferated in social media in recent weeks.
Director Henry said she was very concerned about the possibility of Scotts Valley merging with the City of Santa Cruz because it would lead to loss of SLV control over the Santa Margarita Basin aquifer. She said she simply wanted facts but from a neutral party rather than from Rick and Piret.
President Mahood said she had gone back and forth on this. SLVWD is a product of many annexations with smaller districts, driven by the problems that small districts face. The challenges for small districts will only increase in the future, and regionalization is an inevitable part of our future. She said that while we don't yet know the plusses and minuses of consolidation, she did not support addressing this issue at this time. The District has five new pipeline projects plus the fire recovery work plus Covid. In addition, the District’s ratepayers are really suffering right now. Therefore, she did not see this as a good time to take on a project that will lead to community division and upset. She appreciated the argument for inching forward, but she expected our situation to be different three years from now, and she also wanted to know the results of the SMGWA process (due in February, 2022). She advocated for tabling the topic, including any feasibility study, for at least three years.
Rick Rogers drew a distinction between Director Smolley’s proposal and Director Fultz’s proposal, stating that the latter would not be feasible for Staff to undertake. Director Fultz responded that his proposal was exactly the same as Director Smolley’s with the addition of a summary budget. He thought it might entail two days of work at most. He also noted that the SMGWA first draft will be available in six months and could provide a useful complement to the two-page term sheet.
Director To spoke briefly in favor of the Ad Hoc committee, saying it wouldn’t cost anything. However, President Mahood noted that this proposal was tied to the consultant’s feasibility study, which would not be free of cost.
Director Smolley said he still believed the two District Managers could produce the two-page high-level summary of pros and cons in a month without much demand on the Staff. He moved that Rick Rogers and Piret Harmon (Rick’s counterpart at Scotts Valley Water District) prepare a brief summary of pros and cons and include some kind of budget analysis along the lines that Director Fultz was suggesting. Director To seconded this, and Director Fultz proposed allowing two months for this to be completed. Director Henry questioned whether the Board could assume that Piret would participate, but Rick felt confident that she would. He said he would seek further guidance from Director Smolley on the budget analysis.
With this new motion on the table, President Mahood called for another round of public comment.
Jim Mosher said he didn’t have a big objection, but the motion was just kicking the issue down the road and would lead to another meeting with 60-100 people raising the same objections in two months. He still preferred to see the District remove this issue from its list of active concerns, and he again urged the Board to table the consolidation question.
Former Director Bill Smallman offered a fairly contentious series of remarks culminating in an exhortation for people to immediately initiate a large-scale email protest of any potential consolidation.
Alaina Laing said she was disappointed that the Board appeared to be moving away from the idea of the Ad Hoc committee. She still felt the two districts had a lot to gain from a consolidation, and she was still worried about the City of Santa Cruz.
Cynthia Dzendzel said she was happy with the new proposal. She agreed that the District and community have many other things to worry about, but she appreciated the effort to find some facts.
Another member of the public recommended that the two-pager also explicitly explain why it is time-critical to address the consolidation possibility as soon as possible.
Chris Moran said she still thought this was a bad time to tackle consolidation, and the new motion just drags this out. She said that once the District consolidates with Scotts Valley, it will have no more control, and Scotts Valley could still push for consolidation with Santa Cruz as well. She said that Scotts Valley wanted SLV’s water, and consolidation was a bad idea.
Lee Allen Sanders thanked the Directors for their gentle approach to this topic. He asked if all conversations between the two District Managers could be recorded, transcribed, and made available to the public. When pressed for a response, Legal Counsel Gina Nicholls said there was no quick answer to this question.
Lorraine Palmer asked if the two-pager could include per capita usage for each district both before the last drought and during the last drought. She also wanted it to include anticipated growth over the next 30 years.
Kristin Sandel agreed with tabling the consolidation question for now because it is such a large issue with an irreversible outcome.
Beth Hollenbeck suggested that any business decision should consider the worst-case scenario in the past 100 years. She thought that looking at operational costs was worthwhile independent of the consolidation question, but she felt that it was just too stressful for the community to engage with consolidation right now.
Director Henry argued that Scotts Valley, because it is smaller, would be giving up its water rights to SLV, not the other way around.
The motion passed 5-0.
At this point, Director To left the meeting because she wasn’t feeling well.
Grand Jury Response
This item first came to the Board at the previous meeting. Legal Counsel Gina Nicholls explained that the initial draft response to the Grand Jury, presented at that meeting, was deemed unsatisfactory, and the Grand Jury granted the District a one-time extension to March 12th to prepare and submit a revised response. The new version provided significantly more information and relevant context.
Director Fultz read a prepared statement in which he said he still thought the letter fell short of where it needed to be in explaining the challenges the Lompico community has faced. His concerns were heightened by hearing that the Lompico Assessment District Oversight Committee (LADOC) is out of money while there are still two projects remaining with an estimated cost of $2 to $3 million. He said he would vote against submitting the revised letter and would encourage the Grand Jury to seek input from all parties.
Director Henry said the last two tanks are scheduled to be replaced by May 10th. The other big item is the intertie. It’s true that the money from the assessment fee has been spent, but she argued that special districts, since 1979, have received money from property taxes, and the annual contribution from Lompico may grow to $100,000 per year.
Director Smolley said he didn’t see a time frame for completing the annual report from the past year. He wondered if it would make sense to instead submit a biannual report.
Director Henry (who is the liaison to LADOC) said the report was supposed to be completed by the end of 2020 but was delayed by the dual disruptions of the pandemic and the fire. As soon LADOC appointments are confirmed for 2021 (see below), the report will be rapidly completed.
Director Smolley then directed his attention to various fine points of the response, and Gina offered acceptable answers.
Two members of the public provided input. Mark Lee said the letter looked fine to him. Toni Norton (the chair of LADOC) explained that nothing was accomplished in the first eighteen months after the merger. If the former District Manager had addressed the projects promptly, they would have been completed at lower cost.
President Mahood said that if Toni was happy with the letter, then so was she. She moved that it be adopted with minor edits, and Director Henry seconded this. The motion passed 3-1 with Director Fultz opposing and Director To not present.
Approving Minutes for Special BOD Meeting 2/22
At the previous Board meeting, Director Fultz requested the opportunity to review the February 22nd minutes offline in order to potentially correct and/or expand the record relating to a prepared statement that he had read. President Mahood explained that she had erred in allowing this because minutes are supposed to reflect what happened at the meeting itself. If someone wants to make changes, they should come to the Board meeting with these changes. She proposed that Director Fultz’s comments be appended to the minutes in this one instance.
Director Henry questioned this, saying that minutes, according to the Board Policy Manual, are supposed to be “summary minutes” rather than prepared statements. President Mahood said she would not make this mistake in the future, and any revisions would have to be cast as summary minutes. Secretary Holly Hossack asked whether statements read aloud should be included verbatim as written additions to the minutes. President Mahood said this has not been done in the past and should not be done in the future. She felt that the CCTV recording provided adequate access to the precise statements made during the course of the meeting.
Director Fultz suggested that including statements verbatim in the meeting minutes would improve transparency. This led to a further exchange between Directors Fultz and Henry which President Mahood sought to quell by saying that the recommended procedure should be included in the updated Board Policy Manual.
There was no public input.
The motion to include Director Fultz’s statement passed 3-1, Director Henry opposing and Director To not present.
New Business
Committee Appointments
There were four applicants to serve on the Lompico Assessment District Oversight Committee (LADOC), and President Mahood moved that all four be appointed: Toni Norton, Norman Hagen, MaryAnn LoBalbo, and Jaimie Newton.
There was no consequential public comment. The motion passed 4-0, Director To not present.
President Mahood requested that Directors Fultz and Henry swap their current committee assignments so that Director Fultz would assume responsibility for Budget and Finance while Director Henry would move to Administration. She noted that both Directors have experience with both committees and are highly qualified for either. However, since Director Fultz has more experience with finance, she felt that he could be more helpful moving forward in the wake of the District’s latest loan. She had discussed this with Director Henry, but the Brown Act had prevented her from discussing it with Director Fultz.
Director Fultz said he needed some time to reflect adequately on this unexpected development, and he asked that this agenda item be deferred to the next Board meeting.
Director Henry expressed a preference for an immediate resolution because there are committee meetings coming up shortly, and a deferred switch wouldn’t take effect until April.
President Mahood said Director Fultz had argued previously that he should be on Budget and Finance, so she thought this would be what he wanted. If not, she was fine with keeping things as they are.
Director Smolley supported Director Fultz's request for more time to assess his options.
President Mahood agreed, asking Director Fultz to let Rick Rogers know his preference in advance of the next meeting.
The meeting was adjourned at 9:35 PM.