Municipal Service Review and Sphere of Influence Study: • San Lucas Water District • San Ardo Water District

LAFCO of Monterey County _ LOCAL AGENCY FORMATION COMMISSION OF MONTEREY COUNTY 2024 Municipal Service Review and Sphere of Influence Study: • San Lucas Water District • San Ardo Water District Adopted by the Commission on October 28, 2024 COMMISSIONERS Chair Kimbley Craig, City Member Vice-Chair Wendy Root Askew, County Member Mary Adams, County Member Ian Oglesby, City Member Mary Ann Leffel, Special District Member Chad Lindley, Special District Member Matt Gourley, Public Member Chris Lopez, Alternate County Member Anna Velazquez, Alternate City Member David Kong, Alternate Special District Member Mike Bikle, Alternate Public Member STAFF Kate McKenna, AICP, Executive Officer Darren McBain, Principal Analyst Jonathan Brinkmann, Senior Analyst Safarina Maluki, Clerk to the Commission / Office Administrator COUNSEL Reed Gallogly, General Counsel LOCAL AGENCY FORMATION COMMISSION OF MONTEREY COUNTY 132 W. Gabilan Street, Suite 102, Salinas, CA 93901 P.O. Box 1369, Salinas, CA 93902 (831) 754-5838 www.monterey.lafco.ca.gov LAFCO of Monterey County 2 Table of Contents Executive Summary Introduction………………………………………………………………4 Key Findings………………………………………………………….....7 Recommended LAFCO Actions……….…………………..8 Regulatory Framework……………………….………………….9 District Profiles San Lucas County Water District..........................11 San Ardo California Water District.......................17 Determinations, as Required by State Law.....................22 Sources and Acknowledgements......................................24 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 3 Executive Summary This Executive Summary begins with an Introduction and Background, followed by Key Findings, Recommended LAFCO Actions, and Regulatory Framework sections. Introduction and Background Study’s Scope This study provides information about the operations, services, and spheres of influence1 of the: • San Lucas County Water District • San Ardo California Water District This study meets LAFCO’s requirements, under state law, for conducting periodic service reviews and sphere of influence studies. The study also includes a list of recommended actions to help ensure that the two districts comply with state laws and best practices for managing public agencies. Services Provided The San Lucas and San Ardo Water Districts each were established with the purpose of providing water and wastewater services to their respective communities. Water Supplies The two districts are located in the Upper Valley Aquifer Subbasin, managed by the Salinas Valley Basin Groundwater Sustainability Agency (SVBGSA, a Joint Powers Authority that LAFCO does not regulate). This agency is tasked with developing a comprehensive groundwater sustainability plan and implementing the plan to achieve basin sustainability by 2040. According to the SVBGSA’s 2022 Groundwater Sustainability Plan for the Upper Valley Aquifer Subbasin, this subbasin is not in overdraft. Water Quality The San Lucas Water District has historically faced water quality problems. For over ten years, the District has not had a reliable water source that consistently meets water quality standards. The community’s water quality issues are due to nitrate, iron, manganese, salinity, and sulfate contaminants. These groundwater contaminants are present at levels that violate California drinking water standards. The existing water treatment system is unable to adequately mitigate these contaminants. Potential solutions are being evaluated. Additional discussion on this topic is included under the District Profile for the San Lucas Water District. Located approximately 20 miles south of King City and 10 miles south of San Lucas, the San Ardo Water District has not historically experienced water quality issues. The Monterey County Health Department temporarily issued a do-not-drink order for the San Ardo Water District after the water system was contaminated due to flooding in 2023. The order was lifted in March 2023 after the District made emergency system repairs and testing confirmed that the water was safe to drink. The District Profile for the San Ardo Water District includes additional discussion about this topic. 1 A Sphere of Influence is defined by LAFCO of Monterey County as “A plan for the probable physical boundaries and service area of a local agency, as determined by LAFCO ([California Government Code] section 56076). The area around a local agency eligible for annexation and extension of urban service within a twenty-year period.” LAFCO of Monterey County 4 San Ardo and San Lucas Water Districts King City (not part of this study) San Lucas Water District San Ardo Water District 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 5 Introduction and Background (continued) Independent Special Districts Serving Rural Communities The San Lucas and San Ardo Water Districts exemplify the important role of independent special districts serving their respective rural communities in Monterey County. These districts play a crucial role in providing essential water and wastewater services. Similar to other areas in the county, such as Spreckels and Aromas, which also have their own special districts, these two water districts aim to ensure reliable service delivery while addressing the challenges of rural infrastructure and sustainability. This study recommends that each district complete capital improvement programs and rate studies to assess the future costs of service provision and establish appropriate customer rates. These measures are essential to ensure adequate funding for maintaining district services for each respective community. District Formation The San Ardo and San Lucas Water Districts were formed in 1955 and 1965, respectively. The San Ardo Water District’s formation pre-dated the creation of LAFCOs in 1963. The San Lucas Water District was one of four district formations processed by LAFCO during LAFCO’s first year of operation. Scale of District Operations The two districts share general similarities in terms of district size, services provided, number of service connections, finances, and operations. The San Ardo Water District has approximately 161 service connections compared to San Lucas Water District’s 97 service connections. Potential Future Growth Regional growth projections identify higher-than-average growth in central to southern Salinas Valley area through 2045. The great majority of this growth will likely occur within the cities, not in the unincorporated area. However, in 2006, the County of Monterey previously approved a 33-unit project known as Valley View affordable housing subdivision by CHISPA adjacent to San Lucas. The County also identified several areas as opportunity sites in the San Lucas community for growth and development in its Draft Sixth Cycle Housing Element Update as of August 2024, totaling 22 dwelling units. The County’s Draft Housing Element did not identify opportunity sites in the San Ardo community. Population Served The two districts each serve relatively small populations within their respective district boundaries, as described below: • The San Lucas Water District serves approximately 377 people within the unincorporated community of San Lucas • The San Ardo Water District serves approximately 624 people within the unincorporated community of San Ardo. Existing Boundaries and Spheres of Influence Currently, none of the Districts has a designated sphere of influence beyond their jurisdictional boundaries. The two districts under review serve as exclusive service providers within their defined geographic areas. District boundaries are significant as they define the area where residents are eligible to vote for and serve on the district board. These boundaries also determine where an agency can propose parcel taxes, bond measures, or similar revenue enhancements. LAFCO's sphere of influence designations indicate areas where cities and special districts may plan to expand their boundaries within an approximate 20-year timeframe. LAFCO of Monterey County 6 Key Findings The following key findings highlight the study’s most significant observations and conclusions. 1) To the extent possible, given the fundamental water quality problems facing the San Lucas Water District, both districts are carrying out their missions of providing water and wastewater services to their respective communities. The San Ardo Water District experienced temporary water quality issues when its water system was contaminated from flooding in 2023. The San Ardo Water District took immediate measures, restoring its water system with FEMA funding assistance. Both districts are providing essential services to their communities and work to address service issues when identified. 2) Due to exposure to environmental risks, San Lucas and San Ardo are considered environmental justice communities. The two districts are actively working toward addressing long-term issues of water and sewer system reliability and aging infrastructure. San Lucas’ long-term water quality issues and San Ardo’s water system’s susceptibility to flooding due to climate change have exposed both communities to environmental risks. Given these conditions, both San Lucas and San Ardo are considered communities facing environmental justice issues, as described in Government Code Section 65040.12(e), experiencing unfair exposure to environmental risks due to demographics and location. The San Lucas Water District has faced water quality challenges for over a decade due to high levels of nitrates (due to agricultural fertilizers, storm water run-off, and septic systems) and other groundwater contaminants. The San Ardo Water District’s water well and sewer treatment facilities are located in a floodplain next to the Salinas River, which is vulnerable to flooding. Both districts face challenges of maintaining aging water and sewer systems that are in need of repair and/or replacement. Both districts are currently receiving assistance from the State Water Resources Control Board (SWRCB) and the Rural Community Assistance Corporation (RCAC) to help the districts plan for and fund solutions to long-term system reliability issues and needed capital improvements for their respective water and sewer systems. 3) The two districts have not raised their charges, fees, and rates in more than 10 years. Based on available, unaudited financial information, each district has experienced some degree of deficit spending (annual expenses greater than annual income) within the last five years. As costs for both districts have increased over the last decade, the two districts’ revenues (collected through the districts’ charges and rates) have not increased to keep pace. Lack of increases to the districts’ charges and rates has likely contributed to deficit spending. Representatives of both districts expressed an interest in moving forward with a future rate study and potentially adopting new recommended charges and rates to balance income with expenses. 4) The two districts are not in conformance with several state legal requirements such as adopting an annual budget (San Ardo Water District only), completing annual audits, and ethics training requirements. Both districts face a significant challenge: it appears that there are no recent financial statements or audits from previous years available. It’s essential for both districts to adopt balanced budgets and complete financial audits to confirm the revenue received and ensure proper management of public funds. Nevertheless, district representatives have indicated that each district maintains a positive fund balance and were committed to taking steps necessary to comply with state legal requirements. 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 7 5) No changes to the two districts’ spheres of influence are recommended at this time. The two special districts covered in this report each do not have an existing designated sphere of influence beyond their current boundaries. District representatives have not sought any amendments to their spheres. Staff recommends that no sphere changes are currently warranted. Recommended LAFCO Actions Based on the analysis and in this study, the Executive Officer recommends adoption of a resolution to: 1. Find that, pursuant to Section 15306 of the California Environmental Quality Act (CEQA) Guidelines, the service review and sphere of influence study is categorically exempt, in that the study consists of basic data collection, research, management, and resource evaluation activities that will not result in a serious or major disturbance to an environmental resource, and pursuant to Section 15061(b)(3), because it can be seen with certainty that there is no possibility that this study may have a significant effect on the environment; 2. Adopt the recommended determinations within the 2024 Municipal Service Review and Sphere of Influence Study for the San Lucas and San Ardo Water Districts; 3. Affirm the currently adopted spheres of influence of the San Lucas and San Ardo Water Districts, with no changes; and 4. Authorize the Executive Officer to proceed with a range of corrective measures to address each district’s non-compliance with state legal requirements and best practices, as follows. a. Request that the two districts, as a first priority, take immediate actions to meet legal requirements for financial management and administrative oversight: • Adopt an annual budget for the current Fiscal Year (FY) 2024-25 (San Ardo Water District only); and • Retain a qualified audit consulting firm to perform financial audits for FY 2022-23 and 2023-24. b. Request that the two districts, as a second-tier priority, take actions to comply with other state legal requirements: • Complete required Form 700 (Statements of Economic Interests filings for all Board members and any applicable staff, San Lucas Water District only); • Complete required ethics and harassment prevention training for Board members and staff; and • Comply with website posting requirements per the Brown Act and other state laws (AB 2449, San Ardo Water District only) c. Request that LAFCO staff provide a Board Orientation Training/Compliance Progress-Review meeting within two months after adoption of this study; d. If the two districts have not substantially met State legal requirements within approximately six months of adoption, involve other regulatory oversight agencies, as necessary, to pursue compliance with legal requirements; and e. Encourage the two districts to: • Complete capital improvement programs and rate studies to assess the future costs of service provision and establish appropriate customer rates, • Adopt bylaw amendments that promote compliance with training requirements, • Retain a qualified audit consulting firm to conduct a performance audit (evaluations of the District’s fiscal practices and processes), and • Review and implement best practices recommended by the performance audits and in the Special District Leadership Foundation’s “High Performing District” checklist LAFCO of Monterey County 8 Regulatory Framework This section offers a brief overview of the important legal requirements set by state law, recommended best practices, and the roles of regulatory oversight for public agencies in California. The San Lucas and San Ardo Water Districts are currently working towards compliance with these legal standards. The recommended corrective actions listed in this report are included to help the two districts achieve full compliance. State Law Requirements The California State Legislature has enacted various laws establishing fundamental legal obligations for special districts, many of which also apply to counties and cities. In summary, special districts are generally required to: • Adopt annual budgets • Complete financial audits • Submit annual financial and compensation reports to the California State Controller’s Office • Maintain a website • Hold open public meetings in accordance with the Brown Act • Implement ethics and harassment prevention training for board members • File an annual Form 700 (Statement of Economic Interests) by board members and key staff, and adopt a conflict-of-interest code • Adopt Bylaws for conducting district meetings and proceedings Best Practices In addition to legal requirements, local public agencies are encouraged to adopt best practices that promote public trust and minimize the risk of errors or missteps. The Special District Leadership Foundation’s High Performing District checklist outlines recommended practices in Finance and Human Resources. Key examples of recommended Finance practices include: Establish and periodically review sound fiscal and internal control policies; regularly assess revenue and expenses for compliance with the annual budget; approve capital improvement plans and ensure compliance; and utilize a competitive process for awarding contracts. Regulatory Oversight Local Agency Formation Commissions (LAFCOs) provide oversight of cities and special districts by conducting periodic municipal service reviews and sphere of influence studies, including the current assessment. These studies aim to enhance efficiency and reduce the costs of providing municipal services. LAFCOs commonly inform local agencies of their legal requirements and offer educational resources to promote compliance. However, if non-compliance continues, other oversight agencies may need to become involved. Additional oversight entities include the County Auditor-Controller, the Civil Grand Jury, the District Attorney, the State Controller’s Office, and the State’s Fair Political Practices Commission. 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 9 District Profiles LAFCO of Monterey County 10 San Lucas County Water District Formation Date January 15, 1965 Legal Authority Water Code, Sections 30000-33900 Board of Directors Five-member governing board, elected or appointed for four-year terms District Area Approximately 93 acres Sphere of Influence Same as district boundaries Population (2022 est.) 377 Annual Revenues $130,839 (Fiscal Year 2021-2022; unaudited/self-reported by the District) Employees Five part-time staff/contractors Address 53365 Main Street, San Lucas, CA 93954 Regular Board meetings are held the third Thursday of the month at 6:00 Meetings pm Summary and Background Introduction The San Lucas County Water District was created through a LAFCO of Monterey County district formation process from 1964 to 1965. The District provides both potable water and wastewater services (sewage collection, treatment, and disposal) to the unincorporated community of San Lucas. Water Quality Issues For approximately fourteen years, the District’s customers have experienced unsafe drinking water conditions, primarily due to nitrate contaminants resulting from agricultural fertilizers, storm water run- off, and septic systems. Other drinking water contaminants include salinity, iron, manganese, and sulfate. As a result of these water quality issues, the Monterey County Health Department periodically issued do- not-drink orders when water system testing showed contaminants exceeding safety requirements. Due to these water quality issues, the District has been coordinating distribution of bottled water to the community for drinking and cooking. To address unsafe drinking water conditions, the State Water Resources Control Board (SWRCB) and Rural Community Assistance Corporation (RCAC) are directly assisting the District to identify a permanent solution for provision of potable water to the community. The SWRCB funded a feasibility study and engineering report completed in July 2024, and hosted a San Lucas community meeting in August 2024 to present this information and request community feedback. The feasibility study and engineering report analyzed several options addressing unsafe drinking water conditions. Alternatives included: 1) Consolidation/intertie with King City’s municipal water system (operated by California Water Service Company [CalWater]), 2) Wellhead treatment (ion exchange), 3) Wellhead treatment (reverse osmosis), and 4) Wellhead treatment with new well drilling (only an option if agreement for existing land and well use cannot be reached). All of the proposed alternatives would include rehabilitation of the District’s water and sewer systems. Alternatives one through three have estimated capital costs of approximately $28, $12, and $13 million, respectively. The SWRCB set a deadline of September 30, 2024 for the community to provide written feedback on the three alternatives. As of this writing, the District Board has not provided an official letter 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 11 or taken an official position to express support for one of the alternatives to the SWRCB. The District Board may consider taking an official position in the coming weeks or months. The SWRCB will review the community’s feedback and take this feedback into consideration when making a decision on which alternative to pursue. As of this writing, the SWRCB has not provided an update as to when they intend to make their decision. Supervisor Lopez, whose supervisorial district includes southern Monterey County and San Lucas, submitted a comment letter in support of alternative one. Supervisor Lopez supports this alternative because it would: • Provide a permanent safe water solution by consolidating water infrastructure with the King City municipal water system (operated by CalWater), • Result in the lowest ongoing operational cost, and • Not raise the monthly bill for residents of the community by an exponential factor. Recent Community Improvements In early 2024, the County of Monterey Public Works Department completed street, sidewalk, and street light improvements for the San Lucas community. Completion of these improvements occurred after San Lucas Union School students wrote letters to Supervisor Chris Lopez (District 3) requesting safer routes to school, sidewalks, and better streets. Additionally, high-speed affordable internet was just launched in September to the community of San Lucas. The expansion of the newly built broadband network to this area was partially funded by the American Rescue Plan Act (ARPA) broadband grant awarded by the County of Monterey. These improvements have been a story of success for the community and have been widely reported by news media. Facilities and Services The District office is situated in a repurposed Sewage residence, which it shares with the San Lucas Treatment Cemetery District, located at 53365 Main Street in Facilities San Lucas. The District supplies water and wastewater services to the community, relying solely on groundwater as its water source. The sewage treatment facilities, which include aeration ponds Water and a spray field, are located about a mile north of Storage the District’s boundaries on Highway 198. The San Lucas Tank District’s water well is located approximately two Water District miles south of San Lucas. The District’s water Office storage tank is located several hundred feet northwest of San Lucas. The District maintains aging infrastructure. The District’s water and sewer systems were originally constructed in 1968. The District installed water system upgrades and sewage pump replacements over the last 10-20 years. However, given the current state of both systems and the significant cost estimated to address unsafe drinking water conditions, the District would rely on outside funding sources (Federal and State grant sources primarily) to fund a new safe water source and rehabilitation of water and sewer systems. Governance and Staffing The District is managed by a five-member board of directors. Board members are appointed by the Board of Supervisors when there are no multiple challengers for open positions. If more than two candidates seek LAFCO of Monterey County 12 a single seat, an election is required. Replacing District Board vacancies has proven challenging in the past. However, as of this writing, the District Board had no vacancies. The Board of Directors meets on the third Thursday of each month at 6:00 PM at the District’s office. As is typical for small rural districts, various services are offered by consultants and contract staff on an as- needed basis. Staffing consists of several part-time positions, which include: a secretary, a meter reader, a water/wastewater system operator, a bookkeeper, and an operations and maintenance contractor. The District also contracts with an attorney for legal services as necessary. For more than a decade in some instances, unbeknownst to the District Board of Directors, a now former District employee failed to collect prior charges, fees, and rates legally owed to the District from multiple customers. The District’s legal counsel is helping the District to recover these uncollected revenues to the greatest extent possible. Compliance with State Legal Requirements and Best Practices The District does not comply with several critical State law requirements and best practices for special districts. While it prepares and submits annual financial transaction reports to the State Controller’s Office, the most recent verified, completed audit was for Fiscal Year 2015-2016, according to the Monterey County Auditor-Controller’s records. Additionally, the District employs a bookkeeper for its accounting tasks but lacks an agreement with an accounting firm for annual audits. The District has an adopted annual budget for Fiscal Year 2024-25. The District’s recent meetings have complied with the Brown Act’s open meeting requirements such as posting of a meeting agenda and accessibility to the public. Currently, the District uses a Facebook page as its website. During preparation of this study, LAFCO staff informed the District that, to fully comply with state legal requirements, its website must also provide access to the District’s financial transaction reports and compensation reports. District representatives responded positively to this feedback and made the required updates. The District does not have an adopted policy manual that includes meeting bylaws, regulations, policies, and other provisions. In communications with a District Board member and staff, LAFCO communicated the urgency of addressing the identified compliance issues. District representatives acknowledged the need to complete annual audits, adopt annual budgets, submit Form 700 Statements of Economic Interests, and conduct biennial ethics and harassment prevention training, as mandated by state law. Financial Summary LAFCO has not received any recent audits or unaudited financial statements. Consequently, LAFCO staff relied on the District’s FY 2024-2025 annual budget and annual Financial Transaction Report filings available from the State Controller’s Office. During this study, District representatives did not provide any additional up-to-date financial documents, including a balance sheet, income statement, or check register. The District’s funds are held at Mechanics Bank. In conclusion, due to limited financial oversight and recordkeeping, the District’s financial status cannot be accurately determined. The information presented in the table below is incomplete and unverified. This financial information requires an audit by a qualified accounting firm for a full and precise understanding of the District's finances. Nonetheless, the limited information available indicates that the District may be operating at a deficit, with expenses exceeding revenues. It appears that the District has not increased its charges, fees, and rates for 15 years. To avoid operating at a deficit and to adequately fund maintenance of the District’s water and wastewater systems, LAFCO recommends that the District conduct a rate study to ensure that the District’s charges, fees, and rates are sufficient to fund the costs of providing services. 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 13 Fiscal Year Revenues Expenses End-of-year fund balance 2019-2020 Missing data (LAFCO did not receive a copy of $147,973 $243,532 (unaudited)** the audit in time for the draft MSR)* 2020-2021 Missing data $154,972 $253,709 (unaudited)** 2021-2022 Missing data $130,839 $258,663 (unaudited)** 2022-2023 Missing data (unaudited) 2023-2024 Missing data (unaudited) 2024-2025 $149,587 $179,979 $15,225 (budgeted) * A District representative stated that an audit may have been completed in FY 2019-2020, but the District has not yet provided this information. **Unaudited data reported by the District to the State Controller’s Office. Boundaries and Sphere of Influence The District’s boundaries cover an area of approximately 93 acres, and its boundaries have remained unchanged since its formation. The District’s sphere of influence was established in 1983 and aligns with the current boundaries. The land surrounding the District is primarily used for agricultural purposes. District representatives have not indicated an interest in adjusting the existing boundaries or sphere of influence. LAFCO staff agrees that there are no nearby areas that warrant an expansion of the District’s boundaries or sphere. Recommended LAFCO Actions Based on the information and analysis in this study, the LAFCO Executive Officer recommends that the Commission: 1. Reaffirm a coterminous sphere of influence (i.e., no sphere of influence beyond the District’s existing jurisdictional boundary), 2. Authorize the Executive Officer to proceed with corrective measures to address the District’s areas of non-compliance with state legal requirements and best practices, as described in the Recommended LAFCO Actions section of this study. LAFCO of Monterey County 14 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 15 (blank page) LAFCO of Monterey County 16 San Ardo California Water District Formation Date September 19, 1955 Legal Authority Water Code, Sections 34000-38500 Board of Directors Five-member governing board, elected or appointed for four-year terms District Area Approximately 81 acres Sphere of Influence Same as district boundaries Population (2022 est.) 624 Annual Revenues $150,890 (Fiscal Year 2021-2022; unaudited/self-reported by the District) Employees Seven part-time staff/contractors Address 62543 Main Street, San Ardo, CA 93450 Regular Board meetings are held the second Tuesday of the month at 4:00 Meetings pm Summary and Background Introduction The San Ardo California Water District was formed in 1955 to provide potable water and sewer services— including sewage collection, treatment, and disposal—to the unincorporated community of San Ardo. This community is situated approximately 20 miles south of King City in southern Monterey County, one mile east of Highway 101. The District serves 161 ratepayer accounts, the majority of which are residential connections. 2023 Flooding Impacts Due to significant rainfall in December 2022 and January 2023, flooding impacted the San Ardo community and the District. The floods led to contamination of the community’s water system, making the water unsafe for drinking or cooking. As a result, the community was without safe drinking water for several months following the flooding. The District hired various contractors to repair the District’s infrastructure damaged by the flooding and restore safe drinking water to the community. Although the Federal Emergency Management Agency (FEMA) provided significant grant reimbursement for this emergency work, the District’s emergency repair expenses exceeded FEMA’s reimbursements. The District is still working to resolve payments related to two contractors’ work. The flooding in 2023 underscored the need for the District to safeguard its infrastructure against future flooding events. As of this writing, the District leases land from two separate landowners where its primary groundwater well and sewage treatment facilities are situated. Both facilities are located near the Salinas River, which make them vulnerable to future flooding. The District plans to develop and implement a process to evaluate the feasibility of moving the District’s infrastructure to more resilient sites better protected from future extreme weather events. Community Improvements Earlier this year, high-speed, affordable internet was launched in the community of San Ardo. The expansion of the newly constructed broadband network in this area received partial funding from the 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 17 American Rescue Plan Act (ARPA) broadband grant awarded by the County of Monterey. These improvements have been celebrated as a success for the community and have garnered significant coverage from news media. As of this writing, the County of Monterey Public Works Department is planning street, sidewalk, and street light improvements for the San Ardo community. Completion of these improvements in the next few years will enhance the condition of the community’s transportation facilities, increase pedestrian safety, and help to manage storm water run-off. Facilities and Services The District owns and operates the infrastructure necessary for providing water and wastewater San Ardo services, relying solely on Water District groundwater as its water source. Office Key components of the District’s water and wastewater systems include two wells (one active and Sewage Treatment one reserve), a 55,000-gallon Facilities water tank, a network of water and sewer mains located in streets and easements, and two saturation-evaporation ponds for sewage treatment and disposal. Water The District is housed in a small Storage Tank office building, converted from a residence, located on Main Street in San Ardo. Well The Rural Community Assistance Corporation (RCAC) recently conducted an evaluation of the District’s facilities, which found that all facilities, except for the force main, are in poor condition and require replacement. Most of the facilities have exceeded their life expectancy. Additionally, the District has deferred periodic cleaning of its water tank for a number of years. Both the primary groundwater well and wastewater treatment facilities are located within a floodplain, which is vulnerable to future flooding events. Furthermore, the district office needs to be expanded, since it is too small to comfortably accommodate meetings or support larger projects. District representatives take pride in the strong sense of community spirit, volunteerism, and resourcefulness. Unlike the incorporated communities in the Salinas Valley, San Ardo has not faced significant development pressure. Consequently, the District has maintained a relatively stable customer base, although the seasonal movement of farm labor can cause fluctuations in the total population and household size. The nearby oil and gas industry provides stable employment, but also relies on seasonal and contract workers to meet changing demands. Governance and Staffing The District is governed by a five-member board of directors. Board members are appointed by the Board of Supervisors when there are no competing candidates for open positions. If more than two candidates run for a single seat, an election is held. Filling vacancies on the District Board has been challenging in the past. As of this writing, there are two vacancies due to the resignations of two board members in June 2024. The Board of Directors meets on the second Tuesday of each month at 4:00 PM at the District’s office. As a small rural special district, the District utilizes consultants and contract staff to provide various services as needed. Its staff is comprised of two part-time positions: a combined project manager/operations manager-in-training and an administrative assistant (currently vacant). Consulting/contract staff include: a meter reader, sewage plant operator, a drinking well operator, a LAFCO of Monterey County 18 bookkeeper, and an auditor. The District also contracts with Baker Manoc & Jensen for legal services. The District anticipates consideration of a legal services agreement with County Counsel at its next Board meeting for additional legal services. Over the last few years, the District has experienced challenges in recruitment and retention of its sewage plant operator position. This position is legally required for operation of the District’s sewage treatment facilities. The District recently hired a new plant operator and is exploring ways to ensure that a reserve plant operator is available to ensure plant responsibilities are met in the event of an absence of the primary plant operator. The District received technical assistance and support from various non-profits and government agencies in the past three years. Approximately three years ago, the Central Coast Rural Communities Foundation provided technical assistance to apply for grants to improve the District’s aging infrastructure. RCAC is currently providing technical assistance to identify future infrastructure needs, estimate capital improvement costs, support improvement of infrastructure and financial operations, and support the District in applying for grants to fund capital improvements. RCAC is working with District staff to digitize the District’s facilities and infrastructure using Geographic Information Systems (GIS) mapping. Compliance with State Legal Requirements and Best Practices The District is currently not in compliance with several key state law requirements and best practices for special districts. While it prepares and submits annual financial transaction reports to the State Controller’s Office, the District’s most recent audit, according to the Monterey County Auditor- Controller’s Office, was for Fiscal Year 2016-2017. To assist the District with financial operations, RCAC has hired Regional Government Services (RGS) to provide temporary accounting services. RCAC is also assisting the District as it works toward hiring an auditing firm. As of this writing, the District has not adopted an annual budget for Fiscal Year 2024-2025, and it is unclear when the last budget was approved. Recent meetings have complied with the Brown Act’s open meeting requirements, including the posting of meeting agendas and ensuring public access. The District operates a Facebook page as its website. During this study, LAFCO staff informed the District that, to fully meet state legal requirements, its website must also include access to the District’s financial transaction reports and compensation reports. District representatives were receptive to this feedback and agreed to implement these updates. The District has adopted bylaws but does not have a comprehensive policy manual that includes bylaws, regulations, and other provisions. District Board members have completed annual Form 700 filings. In discussions with a District respresentative, LAFCO highlighted the importance of addressing these compliance issues. District representatives are committed to coming into compliance with state legal requirements to complete annual audits, adopt annual budgets, and conduct biennial ethics and harassment prevention training, all of which are required by state law. Financial Summary LAFCO has not received any recent annual budgets, audits, or unaudited financial statements from the District. Consequently, LAFCO staff obtained unaudited financial information from the District’s annual Financial Transaction Report filings to the State Controller’s Office. During this study, District representatives did not supply any current financial documents, including a balance sheet, income statement, or check register. In conclusion, due to insufficient financial information, the District's financial status cannot be accurately assessed. The information in the table below is incomplete and unverified, necessitating an audit by a qualified accounting firm for a comprehensive understanding of the District's finances. However, the limited information available suggests that the District may have operated at a deficit, with expenses exceeding revenues in FY 2020-2021. The District has not raised its charges, fees, or rates since 2011. To prevent operating at a deficit and to adequately fund the maintenance of the District’s water and wastewater systems, LAFCO recommends that the District complete a rate study to ensure its charges, 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 19 fees, and rates are sufficient to cover service costs. RCAC and the District have discussed the importance of completing a rate study, and RCAC appears to be willing to provide technical assistance in this area. Fiscal Year Revenues Expenses End-of-year fund balance 2019-2020 Missing data 169,914 140,983 (unaudited)* 2020-2021 Missing data 141,411 175,859 (unaudited)* 2021-2022 Missing data 150,890 135,218 (unaudited)* 2022-2023 Missing data (unaudited) 2023-2024 Missing data (unaudited) 2024-2025 Missing data (budgeted) *Unaudited data reported by the District to the State Controller’s Office. Boundaries and Sphere of Influence The District’s boundaries are approximately 80 acres in area and remain unchanged since the District’s formation. The District’s Sphere of Influence was established in 1983 and is the same as current District boundaries. Lands adjacent to the District’s boundaries are mainly used for agriculture. District representatives have not expressed a desire to adjust the existing boundaries or sphere. LAFCO staff has reviewed this conclusion and concurs that there are no nearby areas that warrant addition to the District’s boundaries or sphere. Recommended LAFCO Actions Based on the information and analysis in this study, the LAFCO Executive Officer recommends that the Commission: 1. Reaffirm a coterminous sphere of influence (i.e., no sphere of influence beyond the District’s existing jurisdictional boundary), 2. Authorize the Executive Officer to proceed with corrective measures to address the District’s areas of non-compliance with state legal requirements and best practices, as described in the Recommended LAFCO Actions section of this study. LAFCO of Monterey County 20 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 21 Determinations Municipal Service Review Determinations Per Government Code Section 56430(a) This section contains recommended Municipal Services determinations for the San Lucas and San Ardo Water Districts. 1. Growth and population projections for the affected area No significant population growth is currently projected for the unincorporated communities of San Lucas or San Ardo. 2. Location and characteristics of any disadvantaged unincorporated communities (DUCs) within or contiguous to the sphere of influence State law defines DUCs as communities with an annual median household income of less than 80% of the statewide annual median household income. Census data indicate that residential areas within the San Lucas and San Ardo Water Districts’ existing boundaries and spheres of influence have incomes below 80% of the statewide median income, meeting the definition of DUCs. The districts’ services are available to these residents. 3. Present and planned capacity of public facilities, adequacy of public services, and infrastructure needs and deficiencies (including needs or deficiencies related to sewers, municipal and industrial water, and structural fire protection in any DUCs within, or contiguous to, the sphere of influence) The two water districts have performed significant system upgrades in the past to maintain and improve water and wastewater service levels. The San Lucas Water District is in need of a permanent potable water source, and the San Ardo Water District needs to eventually relocate its primary water well and sewer treatment facilities to less flood prone areas. Both districts anticipate needing to comprehensively replace/rehabilitate their respective water and sewer systems in the foreseeable future. There are no identified DUCs within or contiguous to the districts’ spheres of influence that are unserved or underserved with regard to these districts’ water and wastewater services. 4. Financial ability of agencies to provide services The two water districts operate with limited funding, often relying on part-time staffing levels and dedicated volunteer efforts in order to maintain services. To varying degrees, the two districts have generally experienced financial pressures from higher employment costs (benefits, insurance), lack of growth in charges and rates, and other factors within the past decade. It is recommended that both districts consider conducting a comprehensive rate study in the future. A rate study would seek to enhance each district’s revenue base by aligning projected revenue needs with expenditures. 5. Status of, and Opportunities for, Shared Facilities The San Lucas Water District currently shares office space with the local cemetery district. No other such opportunities in the San Lucas and San Ardo areas were identified. 6. Accountability for community service needs, including government structure and operational efficiencies As detailed in the Executive Summary (Key Findings) and the District Profiles, state laws outline various accountability requirements for special districts. The two water districts seem to be making genuine efforts LAFCO of Monterey County 22 to fulfill these requirements. In cases where specific areas of non-compliance were identified, district representatives expressed a willingness to follow LAFCO’s guidance on meeting state legal obligations. 7. Any Other Matter Related to Effective or Efficient Service Delivery, As Required by Commission Policy LAFCO staff reviewed locally adopted LAFCO policies and noted no additional matters. Sphere of Influence Determinations Per Government Code Section 56425(e) This section provides recommended sphere of influence determinations for the three special districts analyzed in this study. 1. Present and planned land uses in the area, including agricultural and open-space lands No changes to the existing Spheres, and no impacts to agricultural or open-space lands, are foreseen. 2. Present and probable need for public facilities and services in the area There is a demonstrated present need for the improvement of existing public facilities provided by the two districts in this study. Please refer to MSR determinations #1 and #3, above, for related discussion. 3. Present capacity of public facilities and adequacy of public services that the agency provides or is authorized to provide The facilities and infrastructure owned and operated by the two districts are generally functional and providing services in response to current needs. However, there are significant requirements for upgrades and improvements that extend beyond recent enhancements and the current scope of financial resources (see MSR determinations #3 and #4 above for further discussion). 4. The existence of any social or economic communities of interest in the area, if the commission determines that they are relevant to the agency As discussed under MSR determinations #2 and #3, areas within the current boundaries and spheres of influence of the two districts include communities with annual household incomes below 80% of the statewide median household income. These areas appear to meet the definition of Disadvantaged Unincorporated Communities (DUCs). These areas currently have access to district services, and there are no proposed or recommended changes to the existing services or boundaries. 5. For an update of a sphere of influence of a city or special district that provides public facilities or services related to sewers, municipal and industrial water, or structural fire protection, the present and probable need for those public facilities and services of any DUCs within the existing sphere of influence. The San Lucas and San Ardo communities each appear to qualify as Disadvantaged Unincorporated Communities (DUCs). These areas currently receive services from the two water districts examined in this study. No unmet service needs have been identified in or around these communities, and significant population growth is not expected in the near future. However, both districts have noted the need for significant capital reinvestment for future infrastructure improvements. 2024 MSR & Sphere Study: San Lucas and San Ardo Water Districts – Page 23 Sources and Acknowledgements Information that LAFCO received from district representatives (board members and staff) was of key importance in developing this study. The two districts met with LAFCO staff and provided copies of available information and answers to technical questions. District representatives met with LAFCO staff and continued to be available for information over the phone and by email. Without their cooperation and assistance, this report would not have been possible. LAFCO’s earlier Municipal Service Review and Sphere of Influence Studies provided additional background information about the two special districts. LAFCO staff also utilized: • Information provided by the Association of Monterey Bay Area Governments (“AMBAG”) 2022 Regional Growth Forecast, published in June 2022; the 1990, 2000, 2010, and 2020 U.S. Censuses; and 2022 National Funeral Directors Association Cremation & Burial Report; • The State Controller’s By the Numbers website (https://districts.bythenumbers.sco.ca.gov/#!/year/default); • The State Controller’s “Special Uniform Accounting and Reporting Procedures” 2023 Edition (https://www.sco.ca.gov/Files-ARD-Local/spd_manual_2023_edition.pdf); • The Special District Leadership Foundation’s “High-Performing District Checklist” (https://www.co.monterey.ca.us/home/showpublisheddocument/127719/638381500908573245); • The California Special Districts Association’s “Special District Board Member Handbook” (https://www.co.monterey.ca.us/home/showpublisheddocument/127717/638381500899198137). LAFCO of Monterey County 24