CO:MMUNITY SER VICES DISTRICT. January 8, 2016

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1 Chad Blais, President Kenneth J. McLaughlin, Vice President Betty A Anderson, Director Joan E. Roberts, Ph.D., Director Jane F. Anderson, Director ~ CO:MMUNITY SER VICES DISTRICT Bill Blankenship BIA of Southern California, Riverside County Chapter th Street Riverside, CA Re: Comments & Objections to 2015 Capacity Charges Study Dear Mr. Blankenship: This letter is an additional response to the letter that you submitted stated December 14, 2015 and public comments that were provided by representatives of the BIA to the Board of Directors at the December 14, 2015 Board meeting. Excerpts from your December 14, 2015 letter are reproduced below in black. The District's response is indicated in red: Comments and Objections re the (Draft) 2015 Capacity Charges Study 1. The November "Draft" Study: Thus far, we have only been provided with a document that is self-described as a "DRAFT" study of the proposed 2015 Capacity Charges ( dated "November 2015). If there is a more recent version of this Study, or a proposed "final" version of the Study, we would again requestthat it be provided to RC BIA and to the public-before the Board hearing on this matter. The "draft" study posted on the District website on November 17, 2015 is the study that calculates the proposed Capacity Charges. The study is marked "draft" until the Board approves it as final as was explained by District staff at the December 14, 2015 Board meeting. Please understand that the comments and questions presented here are limited to the "Draft Study" and incomplete backup documentation that have been provided to date, and we reserve the right to raise other or different questions based on a more adequate record. 2. Use of "Hybrid" Approach In Calculating New Charges: The "Draft Study" recommends that the District use a "Hybrid" approach in justifying and calculating the proposed new capacity charges that combines a "Buy-In" Approach and an "Incremental" Approach. Would this be consistent with the District's past practices and the methodology used to calculate

2 Page No. 2 the existing capacity charges? If not, what is the justification for changing the approach? The most recent Capacity Charge Studies performed by the District for Water (December, 2006) and Sewer (July, 2005) were based on the Incremental approach. Part of the scope of the current Capacity Charge Study was to evaluate the most appropriate method for recovering the costs of system capacity required to serve new customers based on a current evaluation of the characteristics of the District's water and sewer systems. Based on these criteria, it was determined that the "Hybrid" approach is the most appropriate methodology for recovering costs related to growth. This accounts for the portion of existing capacity that will be used to serve growth as well as additional capacity to be constructed as required for growth. The existing system has some available capacity that will be used to serve future customers. Additionally, the District will have to expand facilities in order to meet the full capacity needs required to provide water and sewer service to new development. The Hybrid approach is a widely accepted Industry standard method used to calculate Capacity Charges pursuant to California law and A WWA published standards. In addition, our consultants have raised concerns that the recommendation to use such a "hybrid" approach may lead to an increased risk of the District charging twice for the same or similar infrastructure improvements; e.g., as part of the existing facilities and as pait of the proposed new or improved facilities envisioned in the Study. If the "hybrid" approach was not used it would result in the District not collecting all costs related to growth. New development will only be required to pay for a proportionate share towards the estimated available capacity within the system. Absent this existing capacity, the District would be required to make further capital improvements to expand the system beyond those currently projected to be built. 3. Flaws and Questions In the "Buy-In" Approach: The use of the so-called "Buy-In" approach in the "Draft Study" is limited to situations where it is shown that the District's existing facilities and systems do in fact have excess capacity available to serve new development and which may therefore be "sold" to new development in the form of buy-in charges. If the District seeks to justify the new capacity charges, in pait, on the notion that its existing system has excess capacity that may be used by and benefit new development, the District must first demonstrate the reasonable current value of the facilities to be used by new development. The "Draft Study" properly notes that the estimated current value of the existing facilities must reflect deductions for depreciation. However, it fails to provide evidence or analysis suppo1ting the rates of depreciation used in its calculations. The Draft Study also fails to provide sufficient evidence or analysis to demonstrate the current (depreciated) value of the facilities that new development would be charged to "buy in" and use. Also note that courts have held that the "value" of such facilities must be based on "historic" costs, rather than on the inflated "replacement cost" of the facilities. (See, e.g., Boa v City of Seattle (Washington 1965) [rejecting a buy-in fee based on purpo1ted "replacement cost" of the facilities, rather than the much lower "historic cost'].) The study calculates the value of the existing water and sewer system based on historic costs that are adjusted to current dollars using the Los Angeles ENG CCI, then are reduced by depreciation (straight line

3 Page No. 3 depreciation over useful life) to account for the portion of the asset that has been exhausted. The resulting calculated net value of the asset is then allocated to existing and growth customers based on the benefit to be derived by those customers ("Value of the Available System"). See Draft Study Appendix I (water and sewer Fixed Assets). This calculation is based on historic costs, inflated to 2015 dollars, rather than developing "replacement costs" (engineering cost estimates to reconstruct the facilities today), which could be higher. There appears to be at least one serious flaw in the "buy-in" methodology used in the "Draft Study". Even assuming that the "Draft Study" was shown to have accurately estimated the depreciated the reasonable current value of the existing and available facilities, it erroneously allocates that value only to the class of "expected future users" - rather than among illl_users ( existing and future users). (See diagram/equation in the "Draft Study" at page 11.) The "Draft Study" thus includes the same flaw in its methodology that was recently criticized in N Idaho Building Contractors' Ass 11 v. City of Hayden (2015) if an agency seeks to impose a "buy-in" fee, it must properly and equitably allocate the "value" of the system among the total number of all users the existing system can supp011, not just "future users."] The "Value of the Available System" included in the diagram/equation in "Draft Study" at page 11 only reflects the value of the system related to growth. In calculating the "Value of the Available System" for growth customers, Appendix I (water and sewer Fixed Assets) correctly allocates that value among all users (existing and future users). Therefore, it is appropriate to divide the value related to growth by "Expected Future Users". The "Draft Study" also fails to demonstrate that it takes into account that new development may have already been paying fees, assessments or taxes, for the benefit of the JCSD while not placing much demand on the facilities. Existing customers built the system based on the then expected future capacity requirements. Adjusting the historic costs to current dollars using the Los Angeles ENG CCI and computing the "Value of the Available System" allows for growth to pay their fair and proportionate share towards the existing system. Absent this calculation, existing customers would be burdened with the carrying costs of growth related capacity in the existing system. The "Draft Study" also fails to take into account that new development will not only pay the one-time capacity charges, but will thereafter pay periodic service charges and monthly rates, thereby paying twice for the upgraded facilities. Recovering costs allocable to growth through the Capacity Charge will avoid the necessity of the District including these costs in the periodic service charges and monthly rates to support project funding. 4. Unfounded Assumptions In the "Incremental" Approach: Since the "Draft Study" relies, in pa11, on the purpo11ed "incremental costs" of constructing new facilities to accommodate demands of new development, the District must show: (a) what new facilities are needed as a result of new development - and may NOT include new or improved facilities made necessaiy by obsolescence of the existing facilities or to meet new regulat01y standards; (b) the estimated reasonable costs of those new facilities needed by growth; and ( c) a fair and reasonable basis of allocating those costs to new development, as distinct from allocating them to the rate payers generally. (Beaumont Investors v. Beaumont Cherry Valley Water Dist. (1985) 165 Cal.App.3d 22 7.)

4 Page No. 4 Although the "Draft Study" appears to be well-written, it relies on mere assumptions and on hearsay conclusions of JCSD Staff - not supported by any documentation included in the "Draft Study" itself or provided to the public - regarding the characterization of new facilities as being "needed" as a result of growth or new development and as to the estimated costs of new facilities purpmtedly caused by growth. As detailed below, the "Draft Study" also fails to adequately explain how the proposed allocation of those costs to growth or new development might be "fair and reasonable." The benefit received by new customers is calculated based on an engineering analysis for all CIP projects using the following methodology: Projects that are only required due to the capacity needs of growth are allocated 100% to growth; Projects for which growth receives no benefit are allocated 100% to existing customers; Projects that have shared benefit are allocated between existing and growth as follows: o Direct allocation based on engineering assessment of capacity requirements; or, o Projects equally benefiting all customers ( existing and growth) are allocated proportionately based on expected MEU's (water) or EDU's (sewer) at build out. Based on engineering analysis the study concludes the current capacity in the existing water and sewer system will benefit both existing and growth customers as available. In order to provide full capacity of the current system in good working order the District will continue to make improvements to the infrastructure. The buy-in component of the Capacity Charge adjusts the value of the existing system by depreciation to account for the pmtion of the existing infrastructure that has been exhausted. These reinvestments in the infrastructure will provide full capacity for all customers including growth. Projects of this nature included in CIP are allocated to all customers. 5. Questionable NEW "Water Resource Capacity Charges": The District has not previously seen the need, or justification, for imposing a distinct charge on new development or new con.nections such as the proposed new "Water Resource Capacity Charge." (The "Draft Study" admits, e.g., at p. 50, that the District is proposing "the addition of the Water Resources Capacity Charge, which did not exist in the previous fee structure. " The District should therefore provide a better explanation to justify why such a new capacity charge should be created at this time, and to identify the JCSD's legal authority for such a charge, which would add $3,557 per MEU to new customers. The Water Resources Capacity Charge did not previously exist as a separate fee in the previous fee structure; however the cost of the projects relating to new sources of water were included as patt of the existing $7,260 Water Capacity Charge (prior study). The current "Draft Study" segregates it as its own charge in order to help provide transparency. The water supply element is a greater share of the cost compared to previous periods. The next increment of growth will require the District to make significant investments in new supply projects in order to provide water to the projected developments. It may be that the JCSD has specific statutoty authorization to establish and impose "capacity charges" of the three types addressed in the Study, but the "Draft Study" does not identify such legal authority - particularly as to "water resource capacity charges. " The Draft Study (p. 8) says only that the proposed water resource charges are "to pay for new water supply or capacity rights to accommodate growth."

5 Page No. 5 Gov. Code Sec (b)(3) defines "capacity charge" to mean a charge for new public facilities to be acquired or constructed in the future "including supply or capacity contracts for rights or entitlements, real property interests, and entitlements and other rights of the local agency involving capital expense relating to its use of existing or new public facilities." Subparagraph (b)(6) refers to Gov. Code Sec for a definition of "public facilities," which is defined therein to include "public improvements, public services, and community amenities." The water resource capacity charge is a charge to pay for additional water supply or capacity contracts for water rights or entitlements and real property interests such as well sites needed to accommodate additional growth. It is not sufficient to only construct additional capacity in the treatment and delivery facilities, in addition, water supplies are also needed to service additional demand. Such a charge, however, does not appear to fit in the statutory definition of "capacity charge" as used in Gov. Code 66013(b), i.e., "a charge for facilities in existence at the time a charge is imposed or charges for new facilities to be constructed in the future that are of benefit to the person or property being charged." The District should identify its legal authority, if any, to establish or collect a charge that would apparently be used, at least in part, to pay other water purveyors for water supplies rather than for constructing new public facilities. (Cf., Price Dev.Co. v. Redevelopmellt Agency of Chino Hills (9 1 Cir. 1988) 852 F.2d 1 123, 1127.) The "Draft Study" includes water resource projects to provide new sources of water and construct interconnections with other agencies to obtain new sources of water, build infrastructure to provide reclaimed water; and the acquisition of water rights required for growth. The purchase of rights funded by Capacity Charges is authorized by Gov. Code Sec (b)(3). The Draft Study does not include costs for paying other water purveyors for the annual purchase of water, which are funded through the District's monthly water rates. 6. Improper Inclusion of "Operations and Maintenance" Costs in the Calculation of the New Capacity Charges: The "Draft Study" indicates (at Sec. 2. I., on p. 4 and elsewhere) that the proposed new charges were based not just on the costs of constructing expanded facilities or services, but also "the incremental operating costs associated with maintaining the additional infrastructure." This is a fundamental error, if in fact the "Draft Study" included any "O & M" costs in the calculation of the new charges. It is well-established by case law, as well as by statute that development fees or charges may not be based on costs of O & M. (Cal. Gov. Code [development fees may not be imposed for the maintenance or operation of public facilities, except in the case of a small development of 19 or fewer lots.] The "Draft Study" does not include O&M costs in the calculation of the capacity charges. Section 2.1 of the "Draft Study" indicates that growth projects create two types of costs - the capital costs of building the infrastructure (which is included in the calculation of the capacity charges); and the incremental O&M costs that are related with that asset (which are not included in the calculation of the capacity charges). 7. Dramatic Increase In Sewer Capacity Charges: It appears that until May 2005, the JCSD's sewer "facilities fees" were only $3,468 per EDU (280 gpd), and the District then adopted Ord. No 208 increasing the sewer "facilities fee" to $5,910 per EDU in all areas of the District "except the Bellgrave A venue Area." The proposed new sewer capacity charges would more than double from $3,468 in 2005 to $7,828 in just ten years, and there should be a better explanation to purportedly justify such a dramatic increase.

6 Page No. 6 As you noted, the last time the District capacity charges were adjusted was approximately IO to 11 years ago. The current capacity charges have no mechanism to adjust the fees for inflation. The proposed capacity charges are based on a current evaluation of the characteristics of the District's water and sewer systems and an updated engineering analysis of growth remaining to build-out. 8. Compliance with Proposition 26? The "Draft Study" noted (p. 6), that the California Supreme Court held (in 2004) that a "capacity charge" is not an "assessment" subject to the constitutional requirements of Proposition 218 (1996). However, following voter approval of Proposition 26 in 2010, there is some authority holding that Proposition 26 may apply to and limit the imposition of water and sewer fees or charges. (Brooktrails Twp. CSD v. Mendocino County (2013) 218 Cal.App.41.) The "Draft Study" does not address whether the proposed new capacity charges would need to comply with Proposition 216, and if so, whether the proposed charges would meet an applicable requirements. The District believes that the proposed Capacity Charges comply with all applicable requirements. The proposed capacity charges would not violate Proposition 26 unless the charges would exceed the projected cost of service, or would overcharge some customers in order to subsidize others. The study carefully avoids either of those two potential inequities. 9. Compliance with CEQA? It is not clear whether, or how, the District proposes to demonstrate compliance with the California Environmental Quality Act ("CEQA") before acting on the proposed new capacity charges. Actions taken to fund capital projects for the expansion of a system or public services are subject to CEQA. (CEQA Guideline sec (b).) The adoption or increase of these new charges is likely to have impacts on the environment, including the development of housing and other resources dependent upon water and sewer connections. The proposed action on these new "charges" would not be "exempt" from CEQA, and any attempt to claim an exemption from any CEQA analysis would be unjustified and an abuse of discretion. There is only a limited exemption from CEQA if the adoption or amendment of charges or fees is not designed to increase services or expand a system. (PRC sec (b )(8); CEQA Guidelines ) That is not the case here, however, since the District's proposed actions are expressly intended to fund the expansion of the District's facilities and services. Moreover, the public has not been provided with substantial evidence in the record to suppo1t the necessary findings for any attempted claim ofceqa exemption. The capacity charges themselves are not subject to CEQA. This is because those charges are for purposes of obtaining funds for capital projects. Both Public Resources Code section 21080(b)(8) and State CEQA Guidelines section I 5273(a) confirm that a general funding mechanism of this type is exempt from CEQA review. All appropriate environmental review will be completed for those projects at the time when specific capital projects are brought forward for construction. 10. Questions and Objections re Inclusion and Allocation of Cost Items in the Proposed New Capacity Charges: See attached CIP analysis spreadsheet for question l 0, 11 & 12. We respectfully question or object to the "Draft Study's" inclusion of ce11ain items in the calculation of the Water Charges. Many items are claimed -but not shown -to be costs of new facilities

7 Page No. 7 exclusively caused by needs of new development, including (without limitation): Line 3 (Eastside non-potable, Line 4 (Fontana interconnection), Line 7 Wells 29 & 30) - showing need caused by 'growth' and appears to be "maintenance' type of cost not Line 11 (Chino 1 reliability) - costs of upgrade 100% to growth providing "resiliency for the system" does not justify allocating Line 20-22; line 23-24; line 25-27; line 28-30; line 31 ; 35; 36; 38 does not justify allocating costs of upgrade I 00% to growth Line 43 (pipeline replacement) - costs of upgrade 100% to growth not caused by 'growth'; 44; 45; 46; 47 does not justify allocating Line 48 ("future annual pipeline replacement) - this undefined 'replacement' project sounds like ordinary "maintenance" and may NOT be included in any "fee" Other "annual misc. projects" - lines 52, 53, 92, 93, 94, - ordinary maintenance items - appropriate for "fees" not Line 99, 101 does not justify allocating costs of upgrade 100% to growth 11. Water Resources Capacity Charges: See attached CIP analysis spreadsheet for question 10, 11 & 12. As noted above, this new "capacity charge" is of questionable legal validity. If lawfully authorized, the factual nexus between the charges and needs caused by new development should be better demonstrated. Finally, if in fact these charges are shown to be lawfully authorized and necessary, then these charges should be fairly allocated to all users, not just too new connections. 12. Sewer Capacity Charge: See attached CIP analysis spreadsheet for question 10, 11 & 12. As above in Section 9, regarding questionable items included in the Water Capacity Charge, we respectfully question several of the Sewer cost items listed in the Draft Study as being allocated to new growth, in whole or in patt: Line 2 (Pyrite Creek)-alleged "resiliency" is system-wide benefit Line 3, 4, 6-not showing need caused by new development. Line 1 1, 12, 13, 14, 15, 16, 19, -"resiliency" is not enough justification Line 20 -River Road Lift Station -Expansion - 100% to growth? Line 21 - Lift Station Pump Replacement - sounds like ordinary "maintenance" which illll1qt legally be included in any fee or capacity charge

8 Page No. 8 Line 27 unidentified "annual capital improvements" - mere"resiliency" Pipeline replacement projects - Line 32, 33, 34; 35; 36 - mere maintenance/not appropriate basis for fees on new growth Line 43; 51; 52; 53 (For example, contrast the claims in the Draft Study that the IT- SCADA costs as work that will "provide resiliency for all customers" against the conclusions by Webb that Line 50, SCADA Maintenance, "provides benefit only to existing users" so as to take it out of the fee I charges on new development.) Line 80; 81 - same objections, costs not shown to be due to growth. As you know the JCSD has been considering the proposed increases to the capacity charges for the most of the past year. Per your request the Board has authorized additional time for interested parties to review the data that supports staff's recommendation for the proposed charges. The next scheduled date for the JCSD Board to consider and adopt the proposed charges is March 14, As such, JCSD requests the BIA please review the response provided and submit any comments or questions no later than February 5, JCSD staff will continue to review and respond to any and all questions or suggestions that interested parties might submit before the planned Board meeting. Please contact me if you have any questions. Sincerely, ~~ Steven Popelar Director of Finance and Administration Enclosure(s): JCSD Budget ( jcsd. us/home/showdocument?id=1664) JCSD Strategic Plan( Webb dated Webb Memo dated Webb Memo dated Webb Memo dated Webb Memo JCSD Development Status and Water Demands JCSD Sewer Master Plan Section 7 and 8 Capacity Charge CIP Support cc: Michael Garrison, BIA Director of Governmental Affairs