City of Sonoma plugs water fund leak

Questions raised earlier this year about the legality of the City of Sonoma’s transfers from its Water Fund to the General Fund recently led to a course correction in how the city handles internal fund transfers – amounting to an acknowledgement that there had been errors in how the City’s books were managed in the recent past.

In a June 19 email to the Index-Tribune, City Manager Cathy Capriola clarified that some of the payments made between 2014 and 2016 were, in light of changes to state law, no longer legal – and a new “comprehensive water rate study needs to occur,” to update the most recent water rate study from 2014.

The issue was originally raised to the City Council in February, when Chris Petlock, a member of the city’s Community Services & Environment Commission, questioned whether the city may have been improperly transferring water fund revenue to the general fund.

Petlock pointed to audited financials from the city budgets showing that a significant portion of water revenues had been transferred to the general fund for several consecutive years since 2012, including a high of 34 percent of water revenues in 2014 – more than $1.4 million in that year alone.

When asked at the time about the persistent transfers, then-Public Works Director Dan Takasugi had said, “Internal transfers from the Water Fund to the General Fund are normal transactions to ensure that the water utility pays its own way for the shared assets and services.”

Added Takasugi: “For the sake of efficiency, the water utility shares many assets and services with the City’s core business, which is funded by the General Fund.”

In other words, since the General Fund pays the bills for such things as staff salaries and other maintenance measures necessary to run the water department, the Water Fund has in the past chipped in on that via monetary transfers to the General Fund.

But those were among the very practices at issue not only in Petlock’s complaint, but in a state district court decision that in 2015 slapped the city of San Juan Capistrano with a multi-million-dollar legal judgement.

In Capriola’s June message, she acknowledged that it was necessary for the city’s general fund to pay back some money to the water fund – and find ways to “sequester” significant monies from the past three years “pending the outcome of the upcoming water rate study and development of an updated Cost Allocation Plan.”

Capriola said the rate study and rate-making adjustments would take six to nine months, and will involve opportunities for public input.

“The City will discontinue two transfers… from the Water Fund to the General Fund that are no longer supported by state law,” said Capriola. “The new water rate study will review and confirm what expenses are cost-justified,” an implicit acknowledgment of Petlock’s concerns.

Capriola’s June message also congratulated Sonomans on their successful water conservation practices, citing “impressive water conservation of 26 percent by our residents and businesses which has water revenue well below what was assumed in the 2014 Water Rate Study.”

The downside of reduced water revenue, of course, is a cash-strapped water budget – and figures for the city’s FY 2017-2018 budget shows a $207,000 shortfall in revenue in the water fund.

That makes it unlikely that City Water rate-payers will get a break on their bills, despite the fix to the budget transfers.

“We don't know the impact on rates until the rate-making consultant does its work. Rates could go up, they could go down,” said Capriola. “We'll have a better sense of where this is going when the first phase is presented to the City Council.”

Petlock, for his part, is just happy to see the city willing to correct its error.

“The public should be thrilled the city is moving in the right direction by stopping the illegal transfers and scheduling a rate study and the city should be commended for this decision,” said Petlock. “Now that there is acknowledgement and movement we can move onto some of the other issues regarding the same.”

Contact Christian at christian.kallen@sonomanews.com.