Vallejo Sanitary Flood Control District drops investments in Septic Tank

7/27/10

By Paul Norberg--retired CFO

July 27, 2010--VSFCD Meeting--6 PM

Consent Item 6c

I am concerned about the investment losses experienced by the district and the impact they will have on future operations.

It appears that you have lost at least $6.5 million on your investments. $1.2 million on CIT Group, $310,000 on AIG, $3.6 million on Lehman Bros and $1.5 million on Washington Mutual. The Washington Mutual was not listed on the Investment Activity report included with this package but it was disclosed back in October 08. I wonder if there are any more losses that I haven’t noted. During this same time the City of Vallejo with a cash and investment portfolio much larger than the Sanitation District had no investment losses to the best of my knowledge.

All of these losses raise several questions:

1. What will be the impact on future rate increases and what investments will have to be curtailed because you don’t have the $6.5 million available? What was the $6.5

2. Who recommended these investments and what action has the district taken to recover damages from the investment advisors?

3. Why didn’t the district purchase insurance on these investments or purchase derivatives to protect against losses?

4. Why is the district still purchasing corporate securities? It looks like you purchased $390,000 in UPS and GE Capital securities in 2010. Did you also buy insurance or derivatives to protect against losses?

5. Are all the $1.7 million in bank CDs fully insured?

6. In 2010 you purchased $27 million in Fannie Mae and Freddie Mac securities.

Although they have the implied backing of the federal government, they are not guaranteed by the federal government. Why didn’t you buy Ginne Mae securities that do have the full guarantee of the federal government?

I am wondering if the district ignored warning signs in the financial markets just to slightly increase the return on investment. Perhaps the Board of Trustees should ask the Vallejo Finance Director to review the investment policies of the Sanitation District. I also have a question on your CAFR audited financial statements for fiscal 6/30/09. Although the report was presented to the Board of Trustees several months ago it still hasn’t been posted on your web site. When will the audited financials be posted? The huge losses experienced by the district have gotten little public attention and I am wondering what your auditors think about your investment policies.

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boohica   |July.28.2010 By the way, if I am wrong about the accounting thing, I apologize, but I am 110% positive it wouldn't have prevented the rate increases or reduced the amount of those increases, they don't require voter approval, just ratepayer silence...

boohica   |July.28.2010 Yes, they split the bill, now the average person can see how much larger their sewer bill is getting without their water bill clouding the issue. I personally applauded the change. It seems to have had little effect, however, as the 50% necessary to prevent increases don't write in to protest. I recall that the change occurred just prior to the water department requesting a rate hike. I think the separation was most likely instigated by the water department for this reason (the sewer portion of the bill may have caused a relatively minor water rate hike to cause a frenzy at the city council meeting due to the overall total on everyone's bill). The only thing that was shared was the bill, the accounting divisions were still separate. In other words, the fiefdom has always existed, and the utilities burden from VSFCD only gets larger. I believe it is more than double what it was in the mid 1990's. As a matter of fact, I think almost all of my utility bills have doubled. I wish I made double what I made back then, then it might not hurt so much...

Michael Tatham   |July.28.2010 Boohica- point of correction, VSFCD was formed in 1952. However until 3-4 years ago the billing was part of water. they split off this to form their own little fifedom at taxpayers expense.

Paul Norberg   |July.28.2010 I spoke to the VCFCD Board of Trustees at their meeting on 7/27 and asked the same questions as outlined above. Mr. Kenneth Spray the Finance Director made these responses: 1. What will be the impact on future rate increases and what capital projects will be deferred because of the investment losses? Response - There will be no impact on future rate increases and no impact on capital projects as the money was not designated for specific capital improvements. 2. Who recommended these investements? Response - the district does not use a financial advisor. Investment decisions are made by the Finance Director. 3. Why didn't the district purchase insurance or derivatives to protect against loss? Response - California law prohibits the district from purchasing derivatives. 4. Why is the district still purchasing corporate securities? Response - the district has a relatively small position in corporate securities and puchased them for diversification. 5. Are all the bank CDs insured? Response - Yes. 6. Why does the district invest in Fannie Mae and Freddie Mac securities rather than Ginne Mae? Response - The federal government has taken over Fannie Mae and Freddie Mac and the disrtict believes there is no credit risk in these securities. Trustee Kondylis suggested that the District create a citizens investment review committee similar to that used by Solano County. The County has significantly more money invested and has not experienced losses like the VSFCD. The District reponded that they would look at the creation of such a committee. The District is actually a component of the the City of Vallejo as it is governed by the Vallejo City Council plus Supervisor Kondylis. As a component unit of the City of Vallejo the officials of the primary government unit (City of Vallejo) are financially accountable for the District. As the City of Vallejo did not experience losses on its investment portfolio I would recommend that the City Finance Director periodically review the investments of the VSFCD. It is my understanding the the City of Vallejo did hold some Lehman Bros investments and realized they were potential problems and sold them before the financial crisis hit in 2008. As a result the City avoided the losses that hit VSFCD. In addition Mr Spray indicated that the CAFR audited financial statement has now been posted to the District web site. I read the report and it makes little reference to the investment losses other than saying that investment income was offset by the write down of Lehman Bros and the loss from Washington Mutual. Unfortunately the activities of the VSFCD get little public attention - only a few people in the audience and little coverage from the Times Herald.

silasbarnabe   |July.28.2010 Some interesting history posted last June by Firebug ToBubba, VSFCD? Have you read this about them and their plans to raise rates? The worst part is that the folks at VSFCD erased the page about their history and the 1988 new treatment center. Here is the link to the old site. http://web.archive.org/web/20021207211806/http://www.vsfcd.com/history_of_the_district.htm#1988 Here is the text that was removed about the 1988 treatment center that was built to the highest specs and the cause of giant rate increases, yet they were found to be out of compliance immediately after the grand opening. 1988 - Present Page Top A new secondary facility was completed in 1988. This facility included biological treatment processes, a new operations building, and additional chlorination and de-chlorination disinfection facilities. THE plant, which is still operating, is currently permitted at 15.5 million gallons per day (mgd) average dry weather flow. Peak dry weather secondary treatment capacity is 30 mgd. SECONDARY treatment dramatically improved the plant's effluent quality. However, discharge violations continued to occur during wet weather. TO address its long-term wastewater treatment needs, the District developed a 20-year Master Plan for wastewater capital facilities that included a program to eliminate sewage overflows to surface waters entering San Francisco Bay. THIS effort involved the construction of new wet weather treatment facilities at the existing wastewater treatment plant as well as improvements to, and evaluation of, the District's collection system. THE new plant facilities, brought on line in 1991, increased the plant's capacity from 30 mgd to 60 mgd during wet weather flows. BETWEEN 1988 and 1995, the District also increased the size of several pipes within the collection system. In 1992, an Inflow/Infiltration Control Program was prepared. The District is following this program as a means to reduce the entrance of non-wastewater into the sanitary sewer system. Sewer Overflows Page Top IN 1996, a citizen lawsuit was instituted against the District under the provisions of the Federal Clean Water Act. The lawsuit focused on sewer overflows, which the District had reported to the San Francisco Regional Water Quality Control Board. ALTHOUGH the District contested the assertion that it had violated the intent of its discharge permits, the District settled the case. In accordance with the settlement the District is conducting a study to determine how to eliminate, by August 2006, overflows not allowed under its discharge permit. Storm Drainage System Page Top OVER the years, the District has also made improvements to the storm drainage system. There are over 150 miles of pipes and channels, as well as four pump stations to provide drainage in the Vallejo area. Severe flooding in the Vallejo area has been reduced substantially. MAJOR facilities constructed include Lake Dalwigk and Austin Creek in the 1950s, and facilities below Lake Chabot Dam in the late 1980s and early 1990s. The District has a minimum capacity requirement for new drainage systems. New public systems must have a capacity to convey the 15-year storm design. Since 1988, if the area drained in one square mile or larger, the required capacity is conveyance for a 100-year storm. The District continues to follow the Storm Drain Master Plan prepared in 1987 and updated in 1992. Another update is planned for 2002. All these upgrades yet BayKeepers sued VSFCD and won because they had substandard waste facilities, and we have to pay millions for upgrades to facilities that were already upgraded.

boohica   |July.27.2010 Mr. Tatham, you are right about the burdensome utilities imho, and it may be too much, but you are wrong about the reason it started and the year as far as VSFCD goes. VSFCD was formed in 1952, NOT 3 years ago. For what it is worth, I have been told by several knowledgeable people on city staff that it was due to City Mismanagement and Violations, and the formation of the District is the result of the State take over. NEXT... Oversight or lack thereof: Here is some interesting reading, so how much DO the board members get for sitting on the board in addition to their City Council wages?! It never occurred to me that they were also paid for this. The compensation was limited, however, that limit may have been removed... Bell, CA anyone???? That would be too funny in such a tragic way. Someone needs to check this out... Mr. Garman? Mr. Norberg http://info.sen.ca.gov/pub/93-94/bill/asm/ab_0801-0850/ab_848_cfa_930413_175644_asm_comm http://info.sen.ca.gov/pub/93-94/bill/asm/ab_0801-0850/ab_848_cfa_930420_113945_asm_comm

Anonymous   |July.27.2010 Do you have a link to their contract? And do you have a link to their pension numbers?

John K   |July.27.2010 Well, it's alarming to read that VSFCD appears to be facing serious investment return shortfalls. Sorta like CalPERS, eh? If they've taken a loss that impacts their op budget, then it's gonna be BOHICA for those of us who have to pay the sewer bill. I'm thinking Mr. Tatum may be on to something in looking at the district creation as a scam to raise fees without voter approval. We don't have to go far to find the folks currently in charge, eh? According the VSFCD website: "The District is a special district that is governed by a Board of Trustees who are elected by the customers we serve. Members of the Vallejo City Council occupy seven seats on this Board. The eighth seat belongs to the Solano County Board of Supervisor who represents customers in our unincorporated areas. While our meetings take place at Vallejo City Hall, our District is a completely independent public agency. The composition of the District Board of Trustees has changed over the years. Initially the Board was composed of four appointed members, two each from the city and county. Later, a fifth at-large member was selected by the other Board members to create a five-member board. In 1995, the District's enabling act was changed to establish the Board as it now exists."

Living In Oz   |July.27.2010 When I lived in LA, the sanitation bill was a part of my water bill; both were lined items. Roughly $25/month for sanitation bill a month back in 2005, now I pay $37 per month here. There is one big difference, the sanitation bill was based on usage, and when I traveled, my monthly sanitation bill, decreased. (same with water, electric, gas). Here, my bill has always remained the same whether I am here or not. The rates are TOO high for GARBAGE AND SANITATION. COUNCILMEMBERS: do what is needed for the CITIZENS- get us rates that are the same as county and/or American Canyon!!!!!

Edinator   |July.27.2010 My bad guys...confused the garbage and flood control items. Caught the boo-boo...now it's fixed. Sheesh.

Michael Tatham   |July.27.2010 John- the sanitation district (VSFCD) was part of the water department unitl ( I believe) about 3 years ago. Then it was spun into an independant company to justify huge rate hikes for neglected capital improvements. In most cities sanitation/flood contro is paid for thru the property taxes or in some case in the water dept. The VSFD is a scam that was creatd by the city budget people to give us more taxes without a say. I deal with many out of town property owners and many are sceptical about these VSFD bills, having never heard of such an entity> Even in other impovershed areas like Richmond where I have dealings there is no such thing. Ifor one can't believe there is no outrage over the burdensome utilities we face in this city.

John K   |July.27.2010 Is there a connection between the Vallejo Garbage Company and the Sanitation District? How does this letter relate to Recology? What did I miss? Admin item 13.B refers the garbage contract. But it appears that VSFCD is having investment problems?

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