When San Diego city officials launched a series of utility-rate hikes in 2007, they expected to spend more than a billion dollars on projects to shore up aging water and sewer systems rife with leaks.
But things have not gone as planned.
Five years later, the Public Utilities Department reports completing 39 of 111 projects promised to ratepayers, and it’s sitting on hundreds of millions of dollars in unspent cash, according to an analysis of city records by inewsource, a journalism nonprofit based at San Diego State University.
The buildup of funds has civic watchdogs questioning how ratepayers’ money has been managed and asking whether rates should be rolled back rather than increased, a prospect the utilities department plans to study.
“You have here $630 million sitting there unused while every two weeks you hear a story about a water main breaking,” said Andrew Hollingworth, a credit union executive, CPA and member of the mayor’s committee overseeing use of the rate funds.
Hollingworth and others monitoring the utilities’ funds say money in the bank is a missed opportunity to take advantage of low construction costs and create jobs in a slow economy.
“You have people sitting unemployed who could be employed on these projects and we really do need to fix our infrastructure and it’s not happened as planned,” he said.
Hollingworth, the San Diego County Taxpayers Association and Councilman Carl DeMaio, who is a member of a council committee that monitors the city’s public utilities, are asking for a full accounting of the ratepayer funds before another increase is considered. The city is only now commissioning an independent audit to do just that – eight months after the conclusion of the four-year rate increases. Such studies were supposed to be an annual component of the program.
The City Council approved a series of rate increases for water and sewer services on Feb. 26, 2007. At the time, regulators were demanding that the city bolster its flagging system of pumps and pipes to stop the spills and provide a safer supply of water.
From July 1, 2005 through July 1, 2010, San Diego raised residential water rates between 16 and 22 percent a year to pay for capital improvements and to cover the increasing costs of imported supplies. That means the average residential water bill skyrocketed by between 82 and 111 percent. Sewer rates also jumped over that period, though not as dramatically.
Public Utilities Director Roger Bailey says he appreciates concerns over rates but he believes the city provides commensurate service. “When you get up in the morning and turn the spigot on it comes, when you flush it goes without fail,” he said. “I think we do a fantastic job given the complexity of the system.”
Bailey likened the hundreds of millions in the water utility funds to a personal bank account after payday — it might seem like a lot of money until the bills are paid. “It’s premature to say you have a surplus before you have completed your obligations,” he said.
An imminent study to examine department finances will address some of the issues raised by skeptics, he said, explaining that the study “is key to figuring out whether you are overcollecting, undercollecting or just about right.”
Bad news, good news
Water officials acknowledge they are up to two years behind schedule on some projects because the city’s financial problems prevented them from accessing the public bond market. They also cited trouble ramping up the capital program because they lacked in-house engineering expertise at the start. Documents show delays for other reasons, including design changes, rebidding and permit problems.
In 2007, the Public Utilities Department projected it would spend $585 million on water capital improvements by the close of fiscal 2011. But, the department spent only $372 million on projects promised as a part of the rate increases.
Documents show the department planned to spend an additional $648 million on wastewater projects through fiscal year 2013, but has only spent about $239 million on projects related to rate increases.
The good news for ratepayers is that a down economy since 2008 has kept construction costs low. City records indicate that half of the 21 “completed” water projects came in under budget for an 18 percent savings.
The completed projects are the ones the department estimated would be the most expensive. They accounted for more than 70 percent of the projected expenditures for the rate increases.
The single biggest water project — at a cost of more than $100 million — is the replacement of 75 miles of aging, corroded cast iron pipes that account for most of the system’s ruptures. That project is listed as “completed” by the city, but its own documents show only 51 miles of that kind of water main pipe have been replaced. The city did not respond to questions late last week specifically about this project.
It’s a paradox that while the rest of the city struggles financially, the water and sewer funds are flush. About $214 million — from four years of rate increases and bond sales — is sitting in the water account and roughly $419 million in the sewer account. Some of it is costing money every day it goes unused. The city paid more than $100 million in interest on utility-related bonds in the last fiscal year alone, according to an official year-end audit.
Each year since 2007, the city has collected more than it spends for operating expenses and bond service by about $10 million to $25 million in the water fund, with a $25 million surplus recorded each of the past two years. On the sewer side, those surpluses were $62.7 million in 2011 and $56.8 million in 2010.
“They might have a problem that there is just way too much cash,” said David Peffer, who manages the water program for the Utility Consumers’ Action Network watchdog group. “…There is a question of not only public accountability, but internal controls.”
He noted a June report by the City Auditor that found several weaknesses in the city’s system for managing capital projects, including water and sewer work. It faulted the city for not having a systematic way to set capital spending priorities. “Without appropriate analysis to justify projects, officials cannot ensure that capital decisions are well-supported to decision makers and the public,” the auditor said.
The city’s accounting is not detailed enough for city watchdogs like Hollingworth, who chairs the city’s Independent Rate Oversight Committee’s finance subcommittee and has experience with large, complicated projects. He managed the finances for a multi-billion-dollar capital improvement program for Los Angeles Unified School District and used to advise the state legislature on construction infrastructure programs for the Office of the Legislative Analyst.
Hollingworth said the financial reports he receives from the Public Utilities Department are fragmented and incomplete and that he has had to create his own analysis using the city’s annual reports from outside auditors and bond prospectuses. He trusts those documents because material misstatements and omissions on those amount to possible violations of federal securities laws. Such a violation occurred in the mid-2000s when the city failed to disclose unfunded pension fund obligations which led to an SEC investigation.
“They really can’t tell you the economics of their program,” he said. “So I have to estimate what the economics are based upon these audited financial statements.”
Demands for accountability
Hollingworth has battled for his criticisms and recommendations to be included in the oversight committee’s annual report, but the utilities department resisted, and some fellow committee members rejected his findings for last year’s report. The latest annual report comes up for a vote by the committee Tuesday. After a couple of special meetings to hammer out differences, Hollingworth’s version made it into the current draft report.
The San Diego County Taxpayers Association is exploring whether the city can legally keep rates at current levels when the increases were approved by the City Council for only four years. And it is wondering how the city can justify selling more bonds in the near future.
“If there is an execution problem, why borrow more money that immediately is going to start incurring debt until you get those issues sorted out?” asked association president Lani Lutar.
As critics demand more accountability, the Public Utilities Department is planning to produce numerous studies. In addition to an audit of rate hike funds, it will assess the condition of the water system’s pipes and its 84,000 valves, as well as examine revenues plus project operating and capital expenses to determine what rates should be. It also will look at how San Diego compares to other cities for water main breaks and water loss.
Despite myriad changes and challenges, San Diego has impressed regulators. The California Department of Public Health, which oversees water supply systems, said the city has completed all of its required tasks with the exception of ongoing mandates.
And the EPA’s Clean Water Act compliance chief in San Francisco praised San Diego’s turnaround from being a flagrant polluter a decade ago. “There are definitely some noteworthy accomplishments the city has made,” said Ken Greenberg. “We are hopeful they will continue to stay in compliance.”
Bailey, the director of Public Utilities, dismissed criticism from people outside the system – like DeMaio, a mayoral candidate.
“This issue pops up time and time again and I go back to an analogy of the spectator and the person who actually plays the game,” he said. “It’s a totally different perspective. When you sit outside you think it’s simple but when you are on the inside you know it’s not that simple.”
U-T San Diego’s Mike Lee contributed to this report.
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Gender Identity
Gender Identity
Gender Identity
Women
80%
Women
82%
Women
75%
Men
20%
Men
18%
Men
25%
Sexual Orientation
Sexual Orientation
Sexual Orientation
Straight
87%
Straight
82%
Straight
100%
LGBTQ-identifying
7%
LGBTQ-identifying
7%
Not specified
7%
Not specified
7%
Speak a language beyond English at home
33%
Speak a language beyond English at home
18%
Speak a language beyond English at home
75%
Race/Ethnicity
Race/Ethnicity
Race/Ethnicity
White
67%
White
73%
White
50%
Hispanic or Latinx
20%
Two or more races
18%
Hispanic or Latinx
50%
Two or more races
13%
Hispanic or Latinx
9%
Age
Age
Age
20-29
40%
20-29
45%
20-29
25%
30-39
47%
30-39
45%
30-39
50%
60 or older
13%
60 or older
9%
60 or older
25%
* The percentages in the charts have been rounded and may not add up to 100.
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Lorie Hearn is the chief executive officer, editor and founder of inewsource. She founded inewsource in the summer of 2009, following a successful reporting and editing career in newspapers. She retired from The San Diego Union-Tribune, where she had been a reporter, Metro Editor and finally the senior editor for Metro and Watchdog Journalism. In addition to department oversight, Hearn personally managed a four-person watchdog team, composed of two data specialists and two investigative reporters. Hearn was a Nieman Foundation fellow at Harvard University in 1994-95. She focused on juvenile justice and drug control policy, a natural course to follow her years as a courts and legal affairs reporter at the San Diego Union and then the Union-Tribune.
Hearn became Metro Editor in 1999 and oversaw regional and city news coverage, which included the city of San Diego’s financial debacle and near bankruptcy. Reporters and editors on Metro during her tenure were part of the Pulitzer Prize-winning stories that exposed Congressman Randy “Duke” Cunningham and led to his imprisonment.
Hearn began her journalism career as a reporter for the Bucks County Courier Times, a small daily outside of Philadelphia, shortly after graduating from the University of Delaware. During the decades following, she moved through countless beats at five newspapers on both coasts.
High-profile coverage included the historic state Supreme Court election in 1986, when three sitting justices were ousted from the bench, and the 1992 execution of Robert Alton Harris. That gas chamber execution was the first time the death penalty was carried out in California in 25 years.
In her nine years as Metro Editor at the Union-Tribune, Hearn made watchdog reporting a priority. Her reporters produced award-winning investigations covering large and small local governments. The depth and breadth of their public service work was most evident in coverage of the wildfires of 2003 and then 2007, when more than half a million people were evacuated from their homes.
Laura Wingard is the managing editor at inewsource. She has been an editor in San Diego since 2002, working at The San Diego Union-Tribune, KPBS and now inewsource. At the Union-Tribune, she served in a variety of roles including as enterprise editor, government editor, public safety and legal affairs editor, and metro editor. She directed the newspaper’s award-winning coverage of the October 2007 wildfires and the 2010 disappearance of Poway teenager Chelsea King. She also oversaw reporting on San Diego’s pension crisis.
For two years, Wingard was news and digital editor at KPBS, overseeing a team of four multimedia reporters and two web producers. She also was the KPBS liaison with inewsource and collaborated with inewsource chief executive officer and editor Lorie Hearn on investigative work by both news organizations.
Wingard also worked at the Las Vegas Review-Journal as the city editor and as an award-winning reporter covering the environment and politics. She also was the assistant managing editor for metro at The Press-Enterprise in Riverside. She earned her bachelor’s degree at California State University, Fullerton, with a double major in communications/journalism and political science.
Brad Racino is the assistant editor and a senior reporter at inewsource. He has produced investigations for print, radio and TV on topics including political corruption, transportation, health, maritime, education and nonprofits.
His cross-platform reporting for inewsource has earned more than 50 awards since 2012, including back-to-back national medals from Investigative Reporters and Editors, two national Edward R. Murrow awards, a Meyer “Mike” Berger award from New York City’s Columbia Journalism School, the Sol Price Award for Responsible Journalism, San Diego SPJ’s First Amendment Award, and a national Emmy nomination.
In 2017, Racino was selected by the Institute for Nonprofit News as one of 10 “Emerging Leaders” in U.S. nonprofit journalism.
Racino has worked as a reporter and database analyst for News21; as a photographer, videographer and reporter for the Columbia Missourian; as a project coordinator for the National Freedom of Information Coalition and as a videographer and editor for Verizon Fios1 TV in New York. He received his master’s degree in journalism from the University of Missouri in 2012.
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