San Diego Citizens' Budget Project

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$2.3 Million
Total amount transferred out of water and sewer funds for "Right of Way Fees"

46 Positions
Total number of positions transferred from General Fund to the Enterprise Funds in the FY 2005 budget

$50 Million
Total amount transferred out of sewer funds through "Service Level Agreements"

$17 Million
Total amount of money transferred out of water funds through "Service Level Agreements"

6 Percent and 7.5 Percent
Total increase in City water and sewer bills respectively in each year for four years-justified presumably by a need for investments in water and sewer infrastructure

NOTE ON FOOTNOTES:
The San Diego Citizens' Budget Project is committed to presenting accurate, methodical research. The Citizens' Budget Plan contains more than 100 footnotes, all of which can be found in the print and full PDF versions.

QUOTABLE:
"The city had retreated from a public offering on the [sewer] bond in January after errors were discovered in its fiscal 2002 financial reports."
- San Diego Union Tribune, June 8, 2004

Launch an Independent Audit of City Enterprise Funds
Improve the Integrity of Water, Sewer and Other Fee-Supported Funds by Ensuring All Expenditures from These Funds are Appropriate

In the budget review, the project came across numerous questionable transfers of funds and personnel that were occurring between the City’s General Fund and the City’s Enterprise and Special Funds. By transferring monies out of the Enterprise and Special Funds, the City can “balance” the General Fund’s budget More importantly, fees supporting these various funds can be imposed and raised by a simple majority vote on the City Council—whereas tax increases to support the General Fund must be submitted to the voter for a 2/3rds vote approval.

Each of these Enterprise and Special Funds have clearly defined purposes and are protected under Proposition 218’s amendments to the State Constitution. Pursuant to Proposition 218, fees collected by the City for the support of these funds (such as the water and sewer fees paid by San Diego homeowners each month) are to be used solely for expenses related to the specific services for which the fee was assessed. Proposition 218 is designed to protect California taxpayers from “hidden taxes” in the form of fees assessed in excess of the cost of service being provided. In other words, if the City were transferring monies out of the water and sewer funds for other uses, it would inflate the “cost of service” in water and sewer—with the excess charges constituting a hidden tax on San Diego homeowners.

Besides constituting a hidden tax, transfers out of the water and sewer funds also undermine the City’s ability to make investments in city infrastructure, fund environmental protection programs, and ensure safe drinking water. Most importantly, such transfers would violate the trust San Diego citizens should have in their government to respect the purposes of these Enterprise and Special funds.

Three transfers of monies from the City’s Enterprise and Special Funds raised the greatest concerns during our budget review:

Internal Services Transfers: More than $75 million is transferred annually from the City’s Enterprise and Special Funds to cover internal support and administrative services under inter-agency agreements called “Service Level Agreements” or “Memoranda of Understanding.” 23 These agreements between City departments specify various charges that will be made against the Enterprise and Special Funds in exchange for information technology support, human resources management, facility maintenance, legal counsel, and even the operation of tourist stations at the City’s reservoirs. No doubt, many of the services and associated charges are legitimate.

What poses the greatest concern are the excessive amounts of money transferred for support services—sometimes with little or no substantiation. In some cases, the SLA or MOU charges the Enterprise fund for staff, but the support agency did not have documentation or timesheets to support the assignment of personnel under the agreement. One employee whistleblower submitted a claim that their Enterprise Fund was being charged 2.5 personnel staff (salary plus overhead) but only were assigned one staff member to perform the work. In another case, the City Attorney charged 16 staff positions to an Enterprise Fund, but could only provide the names of two staff working for that fund when questioned by a local media outlet.

In essence, the Enterprise Fund was being charged for personnel time that could not be substantiated.

Finally, analysis of the San Diego Data Processing Corp. revealed that a “profit” was reverted to the General Fund each year (usually several $1 million to $2 million dollars worth of profit) even though more than two-thirds of charges for services were from accounts outside of the General Fund.

Reassignment of City Employees: In the past five years, dozens of positions have been transferred from the General Fund to Special or Enterprise Funds each year. However, in many cases, no reassignment or redefinition of responsibilities occurred for the staff in question. In essence, the City shifted funding for activities conducted by these personnel from the General Fund to Enterprise Funds. Even in the FY 2005 budget proposal, a number of staff positions are reassigned from the General Fund to “non-General Fund Sources.”

Direct Transfers of Funds: The City’s budget once again imposes an arbitrary “Right of Way” fee of $2.3 million on water and sewer lines for running under City property. 31 Granted, this raid on water and sewer funds was invented in the late 1990s during a similar budget crunch—and at one point these Right of Way fees were as much as $18 million annually. 32 Taxpayer groups for years have fought these fees, and secured a commitment from the previous Mayor and Council to phase these fees out in the late 1990s. Unfortunately, that agreement to phase out these fees was stopped when Mayor Dick Murphy’s assumed office.

The following initiatives would put transparency and integrity back into the City’s use of Enterprise and Special Funds:

• Independent Audit of Enterprise and Special Funds
With its Pension Fund, the City strongly denied under-funding the retirement system until forced to by federal investigations into its securities disclosures and a class action civil lawsuit. For the sewer rates, the City had to be threatened with the possible repayment of over $266 million in state grant monies before it would admit in June 2004 to overcharging residential rate payers on their sewer bills. Hopefully, the same developments will not be needed in this case to restore confidence in the Enterprise and Special Funds.

Even if the City believes that all of its transfers from these funds to the General Fund are appropriate, a full, independent and objective audit of the City’s transfers from Enterprise and Special Funds is warranted—if only to put to rest for once and for all questions being raised. This audit would be instructed to investigate and report publicly on two key issues:

• Internal Services Charges: Review every charge under SLA, MOU or other transfer for any support or direct service to: 1) identify the full amount of funds transferred into the General Fund for each kind of support service and 2) verify that the charges incurred by the Enterprise or Special fund are consistent with the full cost of service to the General Fund 3) compare the charges incurred by the Enterprise or Special Fund with prevailing market rates charged for similar services.

Finally—and perhaps most revealingly—the audit should identify whether the City’s General Fund charged the Enterprise or Special Fund for this kind of support service prior to 1979—and if so at what rate relative to services provided. Proposition 13 was passed by voters in 1978 to limit property taxes assessed by local governments – a reform many argue led to the use of fees to substitute for taxes in California.

• Personnel Assignments: The audit should identify every City employee that is subsidized in whole or in part by an Enterprise or Special Fund—as well as the date the position was transferred from the General Fund. In addition, the audit should identify the job responsibilities performed by the employee to ensure they are fully in accordance with the purposes of the Enterprise or Special Fund to which their expense is charged.

The audit should make recommendations to the Council on adjustment in internal service charges on a go forward basis, as well as identify a process by which the Enterprise and Special Funds could purchase support services outside of the City’s General Service support functions if cost efficiencies can be documented.

• Elimination of the Right-of-Way Fees in FY 2006
Last month, the state and City struck a deal whereby raids on local government finances would be phased out after two years. Borrowing a page from that approach, the Citizens’ Budget Plan would suggest the Council pass an ordinance that would prohibit the imposition of “Right of Way” fees past FY 2005. This would complete the “phase out” promised during the previous Mayor’s tenure and give the City Manager time to accommodate this loss of revenue from the water and sewer funds.