EID by the Numbers: Spending
This is part one of a two-part series on EID spending. Part one explores debt service and the operations budget. Part two will examine benefits and capital spending.
The El Dorado Irrigation District Board of Directors will hear public comment on four more years of proposed rate increases on March 26, immediately following a 6 p.m. rate hearing at the Cameron Park Community Center.
The four-year rate package, in combination with three years of increases approved in 2010, would more than double water rates from 2010 to 2015 for typical El Dorado County water customers.
As in 2010, without an immediate rate increase, EID’s debt service coverage ratio will drop close to 1.25, the critical ratio of revenue to expenses required by bond covenants, which leaves little room to argue the need for either more rate revenue or less spending.
EID General Manager Jim Abercrombie argues that headcount and budgets have already been cut to the bone, and that the proposed rate increases are a necessity to cover operating costs projected to increase 2 percent annually and debt service that’s projected to grow by 6 percent every year through 2016.
The proposed rate increase, in combination with a $2 million debt prepayment last year, raises the projected 2012 debt service ratio from a precarious 1.27 to a more comfortable 1.47, according to the 2012 Mid-Cycle Operating Budget.
Opponents of the rate increase, led by fixEID.org authors Greg Prada and Jon Jakowatz, argue that district excesses of the last 10 years, including lavish salaries, benefits and other overhead, leave plenty of room for additional spending cuts.
In a wide-ranging series of interviews in February and March, Abercrombie and EID Finance Director Mark Price confirmed a $380 million indebtedness that drives the numerator of the debt service equation, and is the subject of an upcoming installment of EID by the numbers.
This story examines spending, which Prada and Jakowatz would like to see reduced before any rate increases beyond 2012 are approved.
The 2012 Mid-Cycle operating budget approved in November 2011 projects 2012 spending at $23 million for debt service, $41.6 for million operating expenses, $17.4 million for capital projects and a one-time $6 million payment toward retiree medical coverage. See adjacent chart.
Abercrombie said he takes pride in the cost cutting he’s achieved since arriving in 2009. He opens a well-thumbed copy of the 2010 CAFR, the district’s most recent Comprehensive Annual Financial Report to quote operating expenses that dropped from $46.3 million in 2008 to $44.2 million in 2009 and $40.4 million in 2010.
To get there district headcount was reduced from a peak of 305 in 2007 to 220 today, unpaid furlough days were introduced, wages frozen, benefits for new hires trimmed and capital projects postponed.
Estimated 2011 operating expenses total $41.1 million, which reflects a $2 million credit for “capitalized” labor costs carried in the CIP budget. Anticipated 2012 operating expenses come to $41.6 million, with an even larger $3.1 million credit for capitalized labor.
The recent practice of backing out a portion of the operating budget’s labor costs doesn’t sit well with Prada. He called it an “accounting gimmick” that understates the cost of operations, facilitates additional spending in budgets falsely labeled as flat and ultimately requires more debt.
“It’s what we really spend,” he said. “You shouldn’t back it out.”
EID Finance Director Price shakes his head and explains that capitalizing labor costs simply moves them from the operating budget into the capital budget within any given year. Abercrombie agrees, and insists it’s a standard industry accounting practice.
The lion’s share of EID’s operations budget, and a sizable portion of its capital budget, is spent maintaining the district’s aging infrastructure, which takes water from clear alpine reservoirs through downstream flumes, ditches, tunnels, and 560 miles of pipe and carries it to lower reservoirs, where it is pumped or gravity fed to customers.
The 4,000 foot elevation change requires 36 pump stations and multiple storage tanks and covered reservoirs. Two large waste water treatment plants were recently upgraded to California’s strict tertiary treatment levels.
The district also runs a hydroelectric power plant in Pollock Pines and a recycled water delivery system in El Dorado Hills.
The system is large and complex, and most ratepayers agree that it works well, as evidenced by strong customer satisfaction surveys, according to EID.
Abercrombie boasts that EID’s stewardship has resulted in a near perfect record of regulatory compliance over the last 10 years, and a top ranking nationally in unplanned water outages per 100 miles of water lines — a testament to proactive maintenance of the water delivery system and the huge west county wastewater treatment plants.
He asks his critics, many of whom are recent arrivals in the district, if they remember the days of “bursting water mains, sewage overflows, regulatory infractions, fines and environmental lawsuits” that plagued the district in the late 1990s.
Abercrombie vowed to remain vigilant and proactive in the capital projects that keep water flowing in and waste water flowing out of the estimated $800 million infrastructure, and argues that spending $10 million to $15 million annually to maintain it is simply prudent.
He challenges his critics to identify a single capital project in the last 10 years that wasn’t necessary, then answers his own question: “Headquarters phase II — if we knew we’d shrink this much we could have put it off.”
Prada cites EID’s $14 million headquarters campus on Mosquito Road, completed in 2006, as a very large example of excess overhead spending.
Of the 220 district employees, more than half work on Mosquito Road in what Prada calls the “Taj Mahal.” He contends the building is half empty, but would prefer to see even less cars in the parking lot, especially since the average EID salary, before benefits, is currently $73,780 per year, according to Communications Director Mary Lynn Carlton.
On his website, www.fixEID.org, and in dozens of e-mail blasts, Prada has also criticized the size of EID’s three-person communications department, 20-person engineering department, 11-person IT department and various lawyers and consultants, most of which he considers overhead.
Prada sat on the 2011 Cost of Service Committee and used committee reports, along with table No. 5 in the 2010 CAFR, to estimate historical overhead.
He found that over the last 10 years the increase in EID overhead costs nearly doubled that of field operations, which rose in line with customer growth and cost of living.
His analysis found that annual overhead costs rose from $7.5 million in 2002 to a peak of $22.1 million in 2008, after which budget cuts reduced overhead to $21.5 million in 2009 and $20.4 million in 2010.
A comparable analysis of the 2012 Mid-Cycle Operating Budget projects $18.6 million in 2011 overhead, which makes up 43 percent of the operating budget, and $20.8 million in 2012, or 47 percent of the budget, before any credits for capitalized labor costs.
Abercrombie flatly refutes Prada’s concept of overhead, along with the charge that headquarters spending is excessive, arguing that many field operations have been automated and centralized over the last 10 years.
“Headquarters does not equal overhead,” he said. “Mechanics, welders, construction people, meter techs, even phone reps all work here in direct support of field operations.”
Prada called on Abercrombie and the board to put off any subsequent-year rate hikes until EID “takes a cleaver” to its operating spending, arguing that gross operating spending, before any capitalized labor credits, has surged $4.8 million since 2010.
In a recent fixEID.org posting he calls for a $3.5 million reduction in overhead, benefits and management perks, which, along with a reduction in the agriculture subsidy, he claims would reduce or eliminate the need for proposed post-2012 water and sewer rate increases.
Prada stops short of proposing layoffs, but notes that Abercrombie’s “cut to the bone” headquarters staff has time to fill the board room during EID’s mid-day board meetings.
He also acknowledges that the cuts will impact customers.
“We can no longer afford the level of customer service that Mosquito Road has provided in the past,” he said. “It’s just too expensive.”
Part two of the Spending edition of EID by the Numbers explores labor costs and capital spending, including “Project 184,” the controversial water, power and recreation project that accounts for 30 percent of the EID water deliveries most years. It can be found at villagelife.com.