Santana: Brea’s Private Water Woes

JULIE LEOPO, Voice of OC

City Treasurer Rick Rios looks over water documents at Cal Domestic Water in Whittier

Brea’s elected City Treasurer Rick Rios has been spending a lot of time in recent months at a tiny, nondescript historical building on the eastern edge of Whittier Boulevard that houses one of the region’s oldest water companies, California Domestic Water.

Cal Domestic Water building in Whittier

Rios is asking a lot of questions about how the city buys it’s water – up to $40 million in purchases over the past two decades, according to a 2016 Orange County Register probe by my former colleague Teri Sforza – ringing alarm bells about the secrecy of water dealings and implications for local taxpayers across North Orange County.

Brea City Treasurer Rick Rios reviewing records at Cal Domestic Water

Keep in mind that the state last year sanctioned former Brea City Manager Tim O’Donnell for failing to disclose he got paid by more than $100,000 from a Cal Domestic subsidiary, Cadway Inc.

All while advising Brea as city manager during a now-disputed $8.1 million water purchase in 2011 that was fueled by the Obama stimulus package.

Rios questions whether the city of Brea actually got what it paid for during the controversial $8.1 million water deal back in 2011.

“Did we get what we paid for? No,” says Rios after months of reviewing records at the company headquarters in Whittier.

“I can easily show that.”

Brea Treasurer Rick Rios reviews water records at Cal Domestic Water

Brea City Manager Bill Gallardo said city officials are comfortable with their purchases, noting that Rios does not speak for the city. He said city officials hired consultants to review the disputed purchases and the city got what it paid for. Despite that, Gallardo said he had city Administrative Services Director Cindy Russell have worked with Rios on the review of records and she has reported back to him that there are no problems.

Yet years after the transaction, company records do show that the minutes of meetings describing the deal were indeed changed to indicate city purchase of preferred stock shares instead of actual water rights.

City officials have proposed changing city contract language to mirror the company view but Rios and others, like Brea activist and downtown developer Dwight Manley, are ringing alarm bells about accepting any changes, arguing city leaders may have been misled into buying phantom shares by a water company in the midst of raising cash to revamp its facilities.

“Every time a Brea residents drinks from a faucet or flushes a toilet, they’re getting ripped off,” said Manley recently from the public comment dais at the city council, echoing what has become a mantra for him about his city water system.

Rios also has asked city council members to hold off on further Cal Domestic dealings until the city has a better understanding of the relationship and what it actually owns.

Council members have yet to take action on either more purchases or the proposed changes to the language of the 2011 deal, indicating they are awaiting a conclusion to Rios’ ongoing review.

Manley also has hired attorneys to look into the relationship and Rios has spent months at Cal Domestic Water reviewing records. Both say they are in the process of filing a lawsuit as the company is withholding relevant records and they believe the statute of limitations may run out on the 2011 transaction this month.

Meanwhile, Cal Domestic officials seem like they are in the process of shutting down to more public questioning.

“I am not going to be answering any questions,” said Cal Domestic Water CEO Lynda Noriega late last week when I called asking about the controversy involving the 2011 purchase.

Gallardo said Cal Domestic has been much more open under Noriega’s leadership – noting she attends city council meetings and is accessible – but he also acknowledges the company hasn’t been transparent in the past.

Indeed, Cal Domestic does operate in what looks to be a very closed environment.

Just one look at its website indicates a place that is not interested in transparency.

I asked Noriega why none of the annual shareholder reports are published on the website for a company that goes back to 1902? (those interested can access a copy of most recent report via the city website link to a pdf-copy.)

I also asked why are there are only three bios on the entire staff page (hers is not included) and none have links?

Again, I got “I am not going to be answering any questions.”

Here’s the mission of Cal Domestic Water, according to the website.

“To Provide its Stockholders with a Reliable Water Supply that Meets all Water Quality Regulations at a Reasonable Price. California Domestic Water Company is a wholesale water distribution company. We are dedicated to providing our wholesale shareholders with quality, service, and value.”

Now, Brea and nearby La Habra supposedly own just over half of the shares in the non-profit water company, Cal Domestic, along with it’s for-profit subsidiary – Cadway Inc.

In concept, the combination of entities buys and sells water at wholesale bargain rates to public municipalities – who as shareholders have control over the company.

Yet all the questioning of Cal Domestic has uncovered at minimum that city officials really don’t know that much about the company they supposedly own or the water rights trading business.

For example, Gallardo proudly told me that Brea has two appointees to Cal Water – sounding like they were appointments to a regional board – where an appointment nets the city a panel vote.

Yet when pressed further about company documents indicating board members have a fiduciary responsibility to Cal Domestic and not Brea, Gallardo agreed that was the case.

So appointed board members from the municipalities to Cal Domestic don’t speak for the public, they respond to the company interests.

Keep that in mind as you read the August 2015 letter from DA investigators to Brea officials about O’Donnell’s role in the relationship between the city and the company.

“O’Donnell was responsible setting the price at which shares in the company (known as ‘common shares’) or water rights (known as ‘preferred shares’) would be sold. During this same time period, the City of Brea entered into multiple contracts with CDWC for the purchase of either common shares or preferred shares. The total value of these contracts is well into the tens of millions of dollars. Some of these purchases of CDWC shares were recommended for approval in written documents signed by either O’Donnell or people reporting to him, such as the Public Works Director. Thus, one of the key issues became whether Mr. O’Donnell has or had a financial interest in CDWC.

“Our investigation found that Mr. O’Donnell received a monthly stipend from CDWC in exchange for his role as a board member. The amount of this stipend since at least 2009 has been $150.00 per month. However, we found that Mr. O’Donnell never accepted any of this money, Rather, his checks were signed over to a charity, and he did not claim the charitable donation as a tax write off. As such, for the $150.00 monthly stipend we did not find evidence of a conflict of interest, nor did we find a willful violation of Form 700 requirements.

“Our findings regarding Cadway were more concerning. As mentioned, Cadway is a wholly-owned subsidiary of CDWC. While initially described to us as a land holding company, we learned that at least part of Cadway’s business or profits involve the leasing of water rights. Cadway has the same address, the same staff, the same President, and the same Board of Directors as CDWC. For all intents and purposes, it appears that Cadway is the for-profit arm of CDWC that allows CDWC to retain its not-for-profit status.

“By virtue of becoming a board member of CDWC, Mr. O’Donnell also became a board member of Cadway. Since 2009, which was the furthest we went back in our investigation, Cadway has paid out over $108,000 to Mr. O’Donnell. (sic) The amount he received has increased each year. This money included a monthly stipend, as well as what were described as ‘quarterly bonuses’ that were based on how well financially the company was doing.

“Nobody we talked to at the City of Brea was aware that by electing a representative to the CDWC Board of Directors, that person would also receive a significant financial benefit from Cadway. We did not find any evidence that Mr. O’Donnell ever disclosed this information, or ever listed it on his Form 700.”

Ultimately, the former DA’s probe didn’t go into how Cal Domestic works and focused only on the lack of reporting by O’Donnell, referring the item to the state’s Fair Political Practices Commission (FPPC).

Last year, the FPPC hit O’Donnell with a $100.00 fine, five times for each year he didn’t disclose $20,000 in profits from a company that benefited from deals with Brea.

So for $100,000 in questionable profits, O’Donnell paid out a $500 fine – because he didn’t disclose his profits.

The public policy implications of all this are ultimately up to the public.

Now, the new city manager, Gallardo says the underlying relationship between Brea and the private, non-profit Cal Domestic Water is a good one and has saved Brea rate payers up to $400,000 in recent years, providing reliable water deliveries for a city with few back up options and no groundwater of its own.

Gallardo’s points largely mirror correspondence reviewed from Cal Domestic Water officials to Brea indicating frustration over the continuing questions and adding that no official investigation to date has found any wrongdoing by officials .

Gallardo said he is concerned about talk of lawsuits, noting that anyone who sues Cal Domestic Water, effectively sues the City of Brea.

While Gallardo wants the Cal Domestic issues resolved and put behind the city, he admits the “issue of water in Brea has always been at the forefront.”

I wonder if Brea residents really understand how murky it all gets when you trace it back through their taps.