LOS ANGELES — A Los Angeles area water district's board of directors demonstrated poor leadership, inappropriately used state funds, and hired unqualified staff, according to a state audit.
The audit released Thursday outlines instances of inappropriate use of public funds by the Central Basin Municipal Water District, including noncompetitive contracting processes, excessive compensation for board members, and the approval in a closed session of a $2.7 million legal trust fund.
Established in 1952, the Central Municipal Water District provides water to 24 cities and six unincorporated areas throughout southeast Los Angeles County. It has a five-member board of directors elected by the public.
"The auditor's report confirms many of the concerns I have expressed about Central Basin, particularly of its board of directors," California Assembly Member Anthony Rendon, D-Paramount said. "The board has failed to promote sound fiscal practices, reflected by the district's operating deficit in three of the last five fiscal years."
The California State Legislature's Joint Audit Committee ordered a financial audit of the district in February.
Among the state auditors' 35 recommendations were that the board set a formal policy for hiring the general manager for the stability of the district's operations; complete a long-term financial plan for financial sustainability; and negotiate cost-effective and appropriate insurance coverage.
"This report concludes that the district's board of directors has failed to provide the leadership necessary for the district to effectively fulfill its responsibilities," State Auditor Elaine Howle wrote in a letter to the state legislature in the audit.
The auditor also said state lawmakers should preserve the district as an independent entity, but modify its governance structure. She suggested the board be appointed by the district's customers, rather than elected by the public.
The audit lists more than 35 recommendations for improvements, most of which district officials said they are working on implementing or plan to adopt.
"We are committed to continuing to move Central Basin toward a more transparent, financially stable and effective district," Central Basin General Manager Kevin Hunt said in a statement.
The water district had experienced high turnover in its general manager and finance manager prior to appointing new people to those positions in April 2015.
"These appointments indicate a greater focus on fiscal diligence and oversight, but governance issues remain a credit risk," Standard & Poor's analysts Chloe Weil and Paul Dyson said in a Sept. 25 ratings report.
The audit "may help facilitate greater financial transparency in the future," Weil and Dyson said.
The auditor expressed concern that the district's debt coverage ratio, which measures its ability to produce enough cash to cover its debt payments, has fallen below the level required by its debt agreements twice in the past five fiscal years. High legal costs and a decline in water revenues contributed to the decline in the district's debt coverage ratio, the audit said.
"This is partly because the board has not ensured that the district has a formal debt management policy, despite the district's external auditors' recommendations that it implement one," according to the state auditor.
Moody's Investors Service downgraded the water district's $48 million in revenue refunding certificates of participation on Oct. 15 citing lower than anticipated debt levels and declining operating revenues due to conservation efforts associated with prolonged drought conditions. S&P lowered the district's long term rating to A from AA and gave the district a negative outlook on April 2014. S&P affirmed the lowered rating on Sept. 24 and maintained a negative outlook.
The water district first came under scrutiny in 2013 when it became the target of a federal investigation of State Sen. Ronald S. Calderon, D-Montebello. The FBI issued several subpoenas of district records at that time.
Calderon, and his brother, former Assemblyman Tom Calderon, once a water district advisor, were indicted on money laundering charges unrelated to the water district and face a trial in federal court next year.