Why Must the MBCSD Increase Water Rates after 7 Years of No Increase?

Every Muir Beach resident deserves and expects that the MBCSD provides clean, safe, and reliable water now and going forward. It goes without saying, that we need it to continue to live in this unique place and to protect the investment we have in our homes.

Here is a factual summary of why the MBCSD needs and should raise water rates for the first time in more than 7 years, and why that increase will cost most households an additional $24.95 a month:

  • With no rate increase in the past 7 years, our water system revenues do not completely cover all our water system’s day-to-day operations.   It is also not covering all the deferred maintenance for our aging pipes, treatment facilities, and essential improvements.
  • Of equal concern, our Water System has only been able to cover all its full operating costs by taking money from the Muir Beach CSD General Governmental funds (tax and reserve revenues.) That means those revenues are not available for badly needed repairs for the Community Center and for our deteriorating roads, trails, and public lands. They are also not available to deal with increasing numbers of aging trees that threaten to fall in winter storms and for building a new Fire House – which must be built to meet fire, emergency and the safety needs of residents.
  • To a lesser extent, last year Muir Beach homeowners paid the lowest cost for water of any nearby small coastal community, and will still be in the lowest percentile with the proposed rate increase.

What are the Current and Proposed Water Rates?

Current District Bi-monthly water rates:

Tiers Gallons Charge
Tier One 0 to 4,500 $49.92 Flat charge
Tier Two 4,500 to 10,000 $0.92 per 100 gallons used, plus charge from prior tier
Tier Three 10,000 to 30,000 $1.29 per 100 gallons used, plus charge from prior tier
Tier Four 30,000+ $1.62 per 100 gallons used, plus charge from prior tier

Proposed District Bi-monthly water rates:

Tiers Gallons Charge
Base Rate 0 to 4,500  $99.84 Flat charge
Tier Two 4,501 to 10,000 $1.84 per 100 gallons used, plus charge from prior tier
Tier Three 10,001 to 20,000 $2.58 per 100 gallons used, plus charge from prior tier
Tier Four 20,001+ $3.24 per 100 gallons used, plus charge from prior tier
1.Rates include an assigned 25% surcharge by the District to be reserved for capital improvements at the direction of the Board of Directors.
2.Charges are calculated per gallon; rates are shown per 100 gallons for clarity only.

Your Opportunity to Get Involved

The proposed rates above will be considered by the Muir Beach Community Services District at a Public Hearing on November 15, 2017 at 7:15pm.  All residents and other interested persons are encouraged to submit written or oral comments at the hearing.

Written comment or protest from water customers or property owners may be submitted in writing and mailed to the District, or hand delivered to the District office during the 45-day comment period, or brought to the public hearing.  The District must receive your signed, written comment or protest prior to the close of the public hearing on November 15, 2017.  Protests should indicate what you are protesting and include information identifying your parcel by parcel number(s) for property(s) you own, and, or your street address.  Multiple comments can be submitted per parcel but only one protest per parcel will be accepted.

Mail or deliver written protests to: Muir Beach CSD, 19 Seacape Drive, Muir Beach, CA 94965

If written protests are filed by a majority of the affected customers, the applicable proposed rate increase will not be imposed.  For assistance in determining your costs under the propose rate adjustment, please call the MBCSD CC Office at 415-383-9969.

Public Comments received by written mail and Responses:


Dear Gary,

Item 11 on tonight’s agenda relating to a rate increase states: “The increase will cover the ongoing fixed and variable costs incurred by producing, distributing, managing and maintaining the capital infrastructure of the MBCSD water system.” The rate increase is being justified by the revenue and expense statement of the proposed district budget for FY 2017/18. But the budget is somewhat misleading.

My understanding is that state regulations, which I have not seen, require that the water department must be solvent and that the current rate structure results in a deficit. The question is how much of a rate increase is required to eliminate the deficit.

Recent court cases indicate that water rates must reflect the actual cost incurred by government in procuring and distributing water. In Muir Beach, it is not the revenue/expense of the water system that is the problem. For example, for 2016/17 revenues for water operations (excluding revenues for capital improvements) were $98,249. Expenses were $129, 682, a shortfall of $31,433.What really blew it open was the water department’s 40% share of general expenses which amounted to $64,493.So it’s the 40% allocation of NONWATER expenses that led to the ballooning of the Water Operations Expense Total of $194,175. In other word, water is being used to subsidize other MBCSD activities. This is being used to justify raising the rates to generate $192,800 of revenues in FY 2017/18. As noted, water rates are supposed to reflect the true cost of water–not other activities.

Notwithstanding, if the general expenses of the District were reduced, it would have a profound effect on the amount of revenue needed to make the water department sustainable. It certainly would not be necessary to double water department revenues from the present levels in 2017/18.

Currently, the reserve fund has a balance of $1,107,052. This includes $215,032 in water capital improvement funds  and will be increased by $50,000 per year based upon the $300 annual fee per parcel approved by the voters, I believe, for 10 years. (Total anticipated revenues $500,000)  There is an Operating Reserve of $175,000 and a $245,820 Unassigned General Reserve “available for any district use”) So the question is, why can’t some of this money be used to defray MBCSD expenses thereby reducing the water department’s 40% allocation and, consequently, the expense of running the water system?

So, for example, could the District’s projected audit cost of $19,000 be paid out of the $175,000 operating reserve? What about the $2500 projected legal fees and Repair and Maintenance (non-water) $4,000; supplies (Non-water $4,000) and Tree Management $4,000?  By paying some of these non-recurring expenses out of the reserve fund, it would have an impact on the amount of any proposed water rate increase by reducing the dollar figure of the 40% allocation. Furthermore, what is the basis for the projected $45,000 increase in payroll(DM)? That is an extraordinary increase over the present $74,536.

The expenses of the water department could be reduced by using the capital improvement reserve to pay for maintenance of the water system projected to be $25,000 in FY 2017/18? Aren’t replacement of water lines etc capital improvements? And, bear in mind, the capital improvement reserve will be replenished to the tune of $50,000 per year for a number of years.

In this connection, the Water revenue section of the water department budget reflects that a total of $49,091 ($26,706 and $22,385)  of capital improvement funds were moved to the capital reserve fund. ($26,706 plus $22,385). What happened to the rest of the $50,000 of revenue from capital improvement fees?

The District is accumulating a great deal of money in the reserve funds which presumably could be used to reduce certain expenditures and thereby make it unnecessary to raise the water rates by such a large factor as has been proposed. If the reserve funds are not to be used, what are they going to be used for?

If the FY 2017/18 budget took the foregoing into consideration and reserve funds were used to reduce expenses this year, then the necessity for further rate increases could be revisited next year.

Thank you for your consideration.

Richard S. Kohn

Comment by Richard Kohn

August 8, 2017

 To the Board Members,

 he July 20, 2017 notice regarding the proposed 100% increase in our water rates came as quite a shock, and at another level, is quite troubling.  Given the unexpected nature of this notice, we would think that most Muir Beach ratepayers would be concerned.  Imagine going to Safeway and seeing that all your usual groceries had doubled since the prior week.  That said, consider this our written protest which will remain in effect until our concerns and questions are adequately addressed.

 We should begin by acknowledging that by most accounts the folks involved with the water district have done a good job providing us with reliable and safe drinking water.  We suspect that this is no easy task since dollars must be balanced with workload and community needs.

 Most residents are undoubtedly aware that untold numbers of municipalities and cities across the country are facing bankruptcy due to financial mismanagement.  This is probably not the  case in Muir Beach, however, given that we are just learning that the water district needs a 100% rate increase to balance the budget, we should all be very concerned about the financial aspects driving the proposed rate increase and the long-term financial health of the water district.

If we understand correctly, the overall cost to deliver water to our homes has increased by 100% over six years.  To put this increase in perspective, inflation in the United States amounted to about 10% over the same period, and the Consumer Price Index increased by about 7% during the period.  On a micro level, most businesses that we are involved with have seen an increase in costs of about 10% over the six year period.  What specifically is driving our extraordinary cost increase?  Usually cost increases of this magnitude relate to personnel and/or pension costs, not office supplies.  While we are not aware any water district related pension or retirement benefit obligations, it would be instructive to know if that is part of the cost issue.  With regard to other personnel related costs, if in fact those costs have materially increased over the last six years, additional details would be appreciated.  Given the astronomical increase in costs, it would seem that this is a cost containment issue, as opposed to a revenue issue.

With regard to the Low-Income Program, the water district should be very careful in this area.  Given that Muir Beach is such a small and concentrated community, these types of programs can be quite divisive.  To be clear, if you own property in Muir Beach, your wealth places you in the top 10 percent when compared to the rest of country, and probably the top 1 percent when compared to the rest of the world.  Given that most of us have limited resources, this low income subsidy means that dollars we would have spent on the truly needy folks that populate our inner cities are instead diverted to a much wealthier and more fortunate group of people that actually own property on the Pacific Ocean.  That is very sad.   That said, the members of the subsidized group should be very limited since I am sure that none of us want to subsidize closet millionaires at the expense of the truly less fortunate.  If we are merely talking about one or two landowners, we do not have a significant problem.  However, if that subsidized group is substantial, we have a serious issue because that population is only going to increase as baby-boomers retire in droves.   Having said all this, it would be helpful to know how many landowners are being subsidized, and what the cost is to the folks that are paying for the subsidy.

 This message will be delivered by email to Mary Halley (mary@muirbeachcsd.com), and by mail to the Muir Beach CSD.

 Thank you for your consideration.


Pat Duff and Wahsitee Chongchua

11 Seacape Drive

Muir Beach, CA   94965 

 Parcel # 199-202-11

Comments by Pat Duff and Wahsitee Chongchua

August 9, 2017

Dear Pat,

Thank you for your well thought out comments and concerns and placeholder protest.  You really have defined the water rate increase to some of the core elements.

While the Board has been discussing this rate increase at the public Board Meetings over the last four months, I can see where anyone who doesn’t usually attend Community Board Meetings may have been surprised by the news.

The rate increase is definitely being driven by personnel wages, salaries, energy costs, and inflationary pressures to some extent.  The water system isn’t in danger of financial collapse, but only because it has been being subsidized by the district’s property taxes that have been covering the shortfall somewhat unnoticed over the past years.

Also, the district had not been including in its water costs the cost for overhead and financial management for the water system, as well as, looking ahead to the replacement costs of aging infrastructure.  The CSD needs to be fiscally responsible to make sure that the system will be able to maintain its infrastructure into the future – being as it is their only source for water.

A 100% increase does sound like a lot, but it is really the equivalent of an increase of $24.95 per month and will bring the monthly Base rate charge up to about the equivalent of a current LAN system payment.  But ultimately, the District does need to charge what it costs to produce, distribute, manage, and maintain the infrastructure, along with inflation.  The district has not been covering sometimes even half its costs over the past seven years plus even a few years prior to that.  So to make sure that we are in compliance starting this year, we simply need to do a catchup all at once.  Also, while a water district must charge a rate sufficient to cover its costs, it cannot charge in excess of that amount, and all fees must and will be used to cover the cost of services.

Any kind of price increase is never desirable to the customer (including myself), but the district was not being fiscally responsible letting the deficit be covered by the property taxes to avoid the not so pleasant process of raising prices, while at the same time, it was incurring increasing costs. Fiscal responsibility is primary to keeping our water system sound and solvent, and with this water rate increase, it will put the water system back on a solid financial footing.

Also, as for the Low-Income program, it will be designed to only be implemented for a two year period to help ease in the rate increase for truly lower income customers, then after that, lower income payers will then need to accommodate the full rate increase.  If they qualify for the first year, they will get an equivalent discount rate of $12.48 per month (the discount does not apply to any other tiers other than the Base Rate), and then if they qualify for the second year, they will need to pay 75% of the increase which will equal $18.75 per month, and then by the third year, they will be paying the full increase of $24.96 per month. The Board felt there needed to be some easing in for truly low-income residents who will need to provide income and financial statements to apply.  And, as it only applies to the Base Rate, it will not provide for a discount on higher water usage.

I hope this has been helpful in answering some of your questions and concerns and I am available to talk or meet with you further, as I very much appreciate that your concerns were genuinely thought out and reasonably presented.  Thank you.



Mary Halley

Co-District Manager


Response to Pat Duff and Washitee Chongchua, MBCSD staff

August 18, 2017

To: MBCSD Board Members

From: Leslie Riehl

190 Pacific Way

Muir Beach, CA

Property #: 199-224-14

Re: Proposed Water Rate Increase

Dear Board Members:

I am writing to protest the proposed water rate increase scheduled for a vote on September 6, 2017.  I do not believe that the Board has adequately addressed the financial situation related to the water department or the district as a whole.  I believe that the District expenses are out of line and the allocation of these excessive expenses should not be borne by the water district.  Clearly, more analysis is needed.

I have prepared my own analysis of the district expenses from information that I obtained from the website.  The documents provided leave many, many financial questions unanswered, in my opinion, and these unanswered issues should be addressed prior to a vote to raise water rates.

I also believe that all members of the Board should be present for the vote.  Please postpone the vote.


Leslie Riehl 


MBCSD Approved 2017/2018 Budget

Is a water rate increase necessary? 

In my quest is to determine if the water rate increase proposed by the Board is necessary and appropriate I delved into the District financial data posted on the website.  The result of my search and analysis indicates that a water rate increase in necessary, but the level of increase is not appropriate.  Why? 

Here’s Why

General District Expenses:

  1. General District Expenses are $207,900.
  2. General District Expenses make up over half of the total CSD expenses.  While not specific to Water, Fire, Roads or Recreation, these overhead costs are largely allocated to each department.  These costs, and their allocation, matter because they help determine the water rates and the monies available to the other departments.
  1. General District Expenses are projected to increase 29% from previous year’s $161,234 to $207,900 for the current year 2017/18.  If the extraordinary cost of the audit is removed, core General District Expenses are going up 60% from last year.
  1. Salary for District Staff and Consultants are projected to increase from last year’s expense of $85,787to $146,000 (up 70%) for the coming year.  Total staff: 3 part time employees and one contract bookkeeper.


  1. Direct Fire Expenses are $25,865.
  1. The General District Expenses allocated to Fire are $20,790, almost as high as the direct expenses.
  1. Tax Revenues from the past and current fire tax ($200 per household) are designated to a specific fund for fire expenses only.  Current balance:  $188,357
  1. The newly approved fire tax ($33,400) is essentially paying for a large portion of the allocated General District overhead expenses even though the District does very little for the Fire Department.  In the past, when Fire Revenues could not cover the direct expenses and the allocated overhead, money was taken from the dedicated Fire Fund to cover the loss.  So, past taxes put into the Fire Fund are being used to cover current District overhead expenses assigned to the Fire Department.
  1. The Fire Department has no paid staff, and work done by the District on behalf of the Fire Department is very minimal.


  1. Direct Expenses for the MBCC are $31,250
  1. General District Expenses allocated to the MBCC are $20,790.
  1. The CC plans to raise rents to cover ongoing expenses associated with the community center.  Expenses for the current year are projected to increase $7,644, or 32%, reflecting an increase in programs to be scheduled at the CC.
  1. Last year and this year projected Revenues include the Measure A Grant from the County.  Several years ago, the funds from Measure A were used (in advance) to cover the costs of the playground renovation.  At the time, money to cover the costs of the playground were removed from the General Fund, with the stated intention that the depleted General Funds would be replaced by monies received each year from the Measure A Grant.

According to the proposed budget, this is not happening.  Instead of replenishing the General Fund, the current Board is putting all incoming Measure A money into the current MBCC budget. This is essentially funding new MBCC capital improvements before the playground expenses are repaid to the General Fund by the Measure A funds.

  1. The CC has three part time staff for a total budget of $15,000.
  1. Rental bookings and Event planning is performed by volunteers.


  1. General repairs for roads are projected to be $12,000.  This does not include the resurfacing of Sunset Way, which is budgeted to be $100,000.
  1. General District Expense allocated to Roads is $20,790.
  1. There are no assigned employees.


  1. Direct Water Expenses are $109,640.
  1. Last year water operating expenses exceeded the projected budget by 40% primarily due to an increase in legal fees, maintenance and other operating expenses.  This year’s direct expense projections are down $20,000, to $109,640.  Overall water operating expenses are still higher than previous years.  Reasons:
  1. Bookkeeping fees have increased from $3,253 to $13,500 or 333%.  Bookkeeping expense for water the equivalent to $14 for every water bill generated during the year.  This seems excessive.
  1. Payroll for a retiree has increased $6,000 per year.  This is a contracted expense.
  1. Payroll for water management team has decreased, partially offsetting other expense increases.
  1. General District Expenses allocated to the Water Department are $83,160
  1. The overhead allocation by the District has risen from $64,493 last year to $83,160 this year.   The increase in the allocation is completely due to an increase in the General District expenses.
  1. The General District expenses allocated to the water operations are not reflective of the actual work performed by the District for the benefit of the water department.
  1. The budget for the proposed rate increase uses the 25% surcharge to cover current operating expenses.  In past years, the surcharge was removed to Capital Improvements.  This is a change in policy.
  1. Total part time employees: 5 and a contract bookkeeper.
  1. The proposed doubling of the water rates will provide the MBCSD with additional $26,045 in cash after the Sunset road repaving.

Is a rate increase necessary?  In my opinion, the short answer is yes, but not necessarily as much as is being asked by the Board.

So, how much of a rate increase is really necessary?  That’s a longer answer.

First, it should be noted that while the MBCSD has approximately $900,000 in the bank, not all of that money is available to be spent on operating and capital expenditures within the community.

  1. The MBCSD has wisely set aside monies for operating and capital emergencies:  $412,660.  This money must not be touched.
  1. The Fire Department and the Water Department have separate funds that cannot be comingled with any other funds at the CSD:  Fire:  $139,363 (I believe this number is understated, but this is what is in the planned budget), and Water: $238,857 (based on the proposed new rates.  The current amount in the bank as of 6/30/17 is $188,357.).
  1. Therefore, the only money left to address roads and recreation is $177,729.
  1. The District has several projects in the works and in different stages of planning:
  1. Water Improvements:  Tank replacement, Pipe replacements, and probably more stuff as well.  At least $350,000 to over a $1,000,000.
  2. Road:  Sunset way repaving, which could include the replacement of pipes along the road.  Other programs I don’t know about. At least $650,000 and could be much more depending upon criteria.
  3. Community Center:  The community center needs work.  How much I don’t know. Cost Unknown.
  1. The reality is that the property tax and other income from the County cannot possibly cover these non-water improvements.  Nor will they be able to in the future.  Why?
  1. The District expenses are too high and seem to be growing every year, especially in the past two years.  Allocating General District expenses to other departments will not make the expenses go away, it merely masks the total expenses incurred by the District.
  1. It is inappropriate to raise water rates to cover General District overhead expenses, as what is really happening is the water rates are subsidizing the General District expenses and the capital improvements for other departments.
  1. Water rates should increase to a level that revenues will cover the projected operating expenses and not more.  Any additional fund requirements need to be addressed separately.
  1. The District now must deal with the projected shortfall associated with the road and community center projects.  Money raised for these projects will be either through Grants or increased fees to residences, but not through water rates.

Final thoughts:

My first review of the District financial statements indicated that a sizeable water rate increase is necessary, BUT, not to pay for District overhead expenses that are not directly associated with the water system.  In my opinion, the District should allocate $31,000 in overhead expenses (not $83,160) to the Water Department.  In addition, the Water Department must find a way to reduce the bookkeeping expenses as $14 per bill is unbelievably high and the legal fees must be controlled.  Finally, a serious discussion on the capital improvements required to the system must be had and quickly.  Then, given all of this information, the rates should be set, but not before.

(My apologies to Leslie, the two spreadsheets would not import.  I will work to see if I can find another way to make them available. MH)

Table 1: Approved MBCSD Budget 2017/2018

No expenses Allocated

Table 2: Approved MBCSD Budget 2017/2018

Leslie Riehl

August 22, 2017

Leslie Riehl’s District Analysis – Comments and Notes for meeting and discussion on Tues 8/22 1pm

General district Expenses:

1,2) CSD General expenses are Management Expenses for all of the 4 charters which are:  Fire, Recreation, Roads, and Water.  There is nothing else that the management is for except to make sure that these charters are organized, managed, and provide those services to the community.

3) Only 3 more audits were budgeted to be paid for this year:  2014, 2015 and 2016.  The costs of pervious audits were not used as a projection for this year’s general expenses.

4) The additional hire of a second part-time DM will increase staff costs for this coming year.  Last year’s DM costs were pushed by the hire of a DM who responded to an ad for a part-time position only to find out it was a full-time job, and the Personnel Committee and Board put him on an hourly wage that pushed his salary to almost $84,000 for the year he was with the District.  Based on that and further investigation, the Personnel Committee determined it was a full-time job but might be best divided between two people.  The part-time salary had been $55,000 per year, so the full-time salary is now $110,000 p/year plus health benefits, that were always provided, but now provided for two.  I was asked to develop a budget to cover all District costs and increased salaries had to be included.


1) The previous DM had allocated 15% of management costs to Fire.  I adjusted it down to 10% based on the amount of time spent by staff on Fire.  It may seem out of balance with their dedicated expenses but managerial costs need to be covered by the 4 charters, so it can’t be just arbitrarily determined in comparison or balance to normal department expenses.  The CSD pays for everything for the Fire Department, the only thing that having a separate budget accomplishes is providing a decision-making framework for the Fire Department.  The allocation of management costs just provides a tool by which the Fire Dept. will know how much the department is costing the CSD and how much is needed to provide services, and perhaps, save and plan for capital expenses and improvements.  The Fire department is just one of the Governmental Services provided by the CSD.

2) By accounting for the Fire Department separately it makes sure that the $33,400 per year will not be spent on other Governmental Service within the District charter besides Fire.

3) The District staff must manage the renewal of all Insurance policies for the Fire department plus coordinate any grants it receives, or legal requirements necessary to be involved in a specific program and all the relevant paperwork that goes along with it, and manages the Fire Tax.  The District has the responsibility and the legal liability for the Fire Dept. even if the Volunteer Fireman provide the physical service.  Both the volunteers and the CSD work together as a team to make sure that the District can continue to provide a service within their charter.


1) MBCC does have very tractable dedicated expenses.

2)  Actually, quite a bit of District management time goes into managing the CC repairs, improvement projects, dealing with neighborly problematic conditions, coordination of various events, and community activities.

3) Yes, the increase in outsider rental fees at the CC is to hopefully help with some of the deferred maintenance, repairs and upgrades.  We have yet to see how it will all work out with higher fees.  Most likely, more per rental, but probably less rentals, so we have yet to see if it will be a wash.

4) This is the last year that Measure A funds will go into the General fund which is where they have been going.  But looking forward, they are restricted funds that will only be able to be spent on recreational uses, and will need to be kept in a separate bank fund from the normal District funds.  Most expenditures that meet the level of spending to be considered a capital improvement come out of the General fund anyway, so it’s probably a wash being as under the District charter, the water is the only CSD business-activity that has funds that are not completely interchangeable with General funds – with the exception of all restricted funds of course.

5) CC full-time staff is for cleaning and grounds maintenance.  It does have volunteer staff as well.  The staff may be increasing with the new rental fees because all the expenses are now included, so those payments that use to be paid directly to the cleaning crew and facilitators, will now run through the CSD.

6) Yes, Amy does the rental bookings, and various volunteers organize the community events, but the CSD pays the event expenses.  This seems to be something the community desires, so the costs are accommodated by the CSD, and work is performed by both District and volunteer staff.


1) Roads are a charter within the District.  The $12,000 is just for planned repairs and maintenance, which this year was to patch Sunset Way.  The Infrastructure project to resurface Sunset Way is a capital improvement project and will come out of unrestricted funds and specifically assigned District funds.  As the Sunset Road starts to get closer to construction, or as a part of any kind of financial planning to generate funding, there will be a larger allocation of district management time added to the capital cost of the project.  The road portion of that project alone should cost close to $600,000+.  It is not a number that can be budgeted for in daily operations.  It will show up in actuals, but will come from reserves, loans, etc.

2) All District charters do have to contribute to their allocated portion of district management time.

3) Any staff time, aside from DM management time, spent on Roads is usually included in the cost of the road repairs and invoices.


4) Yes, the District has major infrastructure projects on the horizon.

5) Water does not subsidize the General District expenses.  The District only exists to manage the four charters as described previous, so there is no other service it provides other than to work on the four department’s activities for providing these four governmental and business services.  District County Counsel advises that the CSD would actually be on more dangerous footing if it was not allocating enough to its Business-activity enterprise and requiring the Governmental-activities funds to cover it.  In effect, using Governmental funds which need to go towards activities of equal benefit to the tax payers, would actually be benefiting the Business enterprise which, while providing equal opportunity for service, does not provide equal benefit based on fees and use.  This becomes the dilemma when the District co-mingles funds. It can run at a loss and still pay its bills, until the tax revenues run out, but it really shouldn’t be covering business losses with public funds.  The water business essentially must pay for its management and that management is provided for by the CSD who operates the business enterprise.

6) Water rates can only pay for cost of services.  This includes producing, distributing, maintaining infrastructure, and management.  Over the past years expenses have been going up, and among them most recently, management costs.  There now is one part-time manager pretty much dedicated to water and finances.  In the last few years, the water system wasn’t paying for management and was letting it be subsidized by property taxes.

7) Water rates are currently just going to cover operating costs and not even start to try to plan for deferred maintenance or how to pay for the larger infrastructure cost in the future – except for the water capital improvement fee which cannot go to daily water operations as it is a restricted fund.

8) You are absolutely right.  The biggest challenge facing the MBCSD and the Community is how to pay for these capital projects that are well beyond both the normal Business-activity revenues and current Governmental revenues.  We have a Grants committee looking into grants and the Board will have to look hard at the tradeoff between time and money costs.  It will completely fall onto the Board to take in community input and figure how to fund these large projects.  In an affluent community like MB, grants are far less likely, so it will probably come down to things like municipal bonds, property assessments, loans, or wait and pay-as-you-go.  The CSD has never borrowed before, it has always had a pay-as-you-go policy, but everyone is going to have to put their heads together to find solutions.  Right now, the water rate increase is just to get the Water operations to cover itself, and while that will free up unrestricted funds for other uses and definitely help, it will not solve all the infrastructure issues facing the District.


1) Itemized management costs for water operations is actually 43%, so an allocation of 40% is pretty close, accurate, and reliable.

Yes, we are looking at all ways to reduce bookkeeping costs, but that will not balance the budget alone.

We are currently in the process of developing a Capital Improvement Schedule – but we do currently have a Capital projects sheet.  Water rate increases are being based solely on Business-activities operational costs, not future capital costs at the moment.  The WCI fee is currently saving for water capital improvements – albeit slowly in comparison with district infrastructure needs.

Yes, the Board voted for the first time to have a water retiree compromise payment, so thus it must be included.

With the Water management team hire we were trying to find another way to look at having a water system operator by having a team approach but not cost the District any more.

3-5) The District only exists to manage the four charters.  The District’s goal is to get the best service and bang for its buck and will continue to do so.  Salary and staff costs are the driving force to why management costs have increased to all departments.  There is no separating the District from its individual charters – they are basically all one right now.  The CSD is planning on the advice of the auditor to separate the Water finances completely from the District’s books but it will still have management costs allocated, although distributed out by proportional percentages for those items that cannot just be expensed directly.

8) Water rate fees cannot directly pay for Sunset Way Road improvements, but it can stop absorbing the property tax revenues that could be used.  The WCI fund can help pay for the new Sunset Way water line and Fire hydrants but not road drainage or surfacing improvements.

Mary Halley – MBCSD Staff

Mary Halley

Co-District Manager


Response to Leslie Riehl, MBCSD staff

August 26, 2017

(Submitted in writing August 31, 2017)

5 Ahab Drive

Muir Beach, CA 94965

Gary Friedman, Esq.


Muir Beach CSD

19 Seacape Drive

Muir Beach, CA 94965

Re: Proposed water rate increase

Dear Gary,

In addition to the concerns raised in my previous correspondence dated July 5, I have considered the question of what impact the court decisions holding tiered water rate systems unconstitutional in violation of Prop 218 [Cal. Const. Art.XIII, Sec.6, subdiv. 3] have on the proposed rate structure. Prop 218, which amended the California Constitution in 1996, prohibits government agencies from charging more for a service than it costs to provide it.[1] In other words, to justify differential pricing, Prop 218 requires that the water supplier must show that the cost of supplying one user class must be proportionally higher than the cost of supplying other user classes.[2] It does not allow governments to set water rates to promote conservation.

In the San Juan Capistrano Taxpayers’ Ass’n. v. City of San Juan Capistrano (2015) 235 Cal.App.4th 1493, modified 36 Cal. App.4th 1123, the most recent court decision to address the legality of tiered water rate systems, the Fourth District

1  Subdiv. 3: “The amount of a fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel.”

2 For example, if a water district encompassed both lowlands and mountainous areas, and it could be demonstrably shown that it is more expensive to deliver water to homes on the mountain, differential rates would be justified.

Gary Friedman, Esq.

August 26, 2017

Page 2.

Court of Appeal struck down a tiered system that created four tiers with different rates per unit of water used. Notwithstanding, tiered pricing is legal as long as the government agency can show that each rate is tied to the cost of providing the water.  As the court said, “The water agency here did not try to calculate the cost of actually providing water at its various tier levels. It merely allocated all its costs among the price tier levels, based not on costs, but on pre-determined usage budgets. Tiered pricing can be sustained but the MBCSD would have to carry its burden of proving that its higher tiers reflected its costs of service.

According to the public hearing notice, the proposed tiers are based on a Base Rate plus a volumetric charge. As explained “The successive tiers have incrementally higher rates to cover the additional infrastructure and operating costs needed to be able to provide higher water volume and maintain the extra storage capacity necessary to have water readily available for delivery to the higher volume users and larger water meter sizes.” But there is no empirical data to show that those costs are higher in Tier 3 than in Tier 2 or in Tier 4 as compared with Tiers 2 and 3. Nor has any evidence been published showing how the rates per gallon for tiers 2, 3 and 4 ($1.84, $2.58 and $3.24, respectively) have been calculated.

In order to comply with Prop 218, the MBCSD would have to be able to show that certain classes are more expensive to service. Tiers would have to reflect the precise cost of delivering water at increasing levels of consumption. If the District is unable to do that, then the four tiers that have been created are arbitrary and invalid. Simply establishing tiers based on “normal” and “excessive” use violates Prop 218. The legal alternative is to establish a single tier system where everyone pays the same rate based upon their usage. Or, perhaps a two- tier system could be justified.

Gary Friedman

August 26, 2017

Page 3.

The public notice states that The District is required by its Water Permit to have tiered rates but obviously a permit issued by the State Water Resources Control Board cannot override the State Constitution.

This analysis gives rise to the following questions:

*Can the MBCSD justify its creation of the four user classes based upon the actual cost of delivering water to each class? If so, what is that justification?

*Has the MBCSD even considered establishing a single rate system? If so, what rate per cubic foot of water would have to be charged to each customer in order to raise the funds necessary to sustain the water system?

*To the extent that the water rates are being used to pay for 40% of general CSD expenses, can the Board identify which of those expenses, including overhead, are related to delivering water? For example, if certain employee salaries are being attributable to water delivery, identify which employees are covered and which are not.

*Has the MBCSD obtained a written legal opinion justifying the creation of the proposed tiered system? If so, will the Board make that opinion public?

As the public notice points out, “Conservation and Efficiency Still Pays.” Let me be clear that I personally find the notion that under Prop 218 government cannot structure services to encourage conservation abhorrent. The fault lies with the initiative system wherein ill-informed citizens vote on measures to amend the State Constitution, like Prop 218, without fully understanding the consequences. The courts are then stuck with what the voters in their wisdom have decided and communities like Muir Beach must cope with the fallout.

I have seen nothing to date that suggests that the MBCSD could carry its burden of proving its higher tiers reflects its costs of service to each tier. Absent such a showing, the tiers are purely arbitrary. As far as the record reveals now, the proposed tiered rates appear to be out of compliance with Prop 218 which

Gary Friedman, Esq.

August 26, 2017

Page 4.

requires that property-related fees are proportional to the actual costs of providing service to that parcel or class of parcels.

A sobering thought is that if a high tier user were to successfully challenge the rate structure, the district could become liable for attorneys’ fees and reimbursement to parcel owners who have been overcharged. That is what happened in the San Juan Capistrano case.

There is a solution to this dilemma. In Capistrano, the Court of Appeal said that any excess cost over the actual cost of providing a service is, in effect, a tax which could be submitted to the voters and approved by them. But that requires an actual vote by the people and cannot be imposed by unilateral action by the Board.

I urge the Board to address these issues and consider the alternatives prior to voting on the proposed rate increase.

Respectfully submitted,

Richard S. Kohn

cc: Victoria Hamilton-Rivers

Paul Jeschke

Lynda Grose Silva

Peter Lambert

Mary Halley

Mike DeGroot

(all by email attachment)

Richard S. Kohn

September 1, 2017

Dear Richard,

Thank you for your evaluation of Prop 218.  I realize this letter was addressed to Gary for the CSD Board’s consideration, but I thought I would try to address briefly the topic of Prop 218.

The CSD has been aware of the legal parameters concerning the use of tiered rates under Prop 218 – which almost 2/3 of California water districts still use.  The CSD started researching the issue and consulting with an attorney on the subject, well over a year ago, as the water district looked to cover its cost of service.  The district has been proceeding responsibly and carefully taking the position that spending a little bit on legal fees now may save in the future.

As you point out, the key to pricing under a tiered system is to be able to justify the pricing at each tier level and also to not charge any more than the cost of service – which does include production, distribution, maintenance, capital improvement for infrastructure, and management costs.

The district has done the calculations that show the additional costs at each tier and the additional revenues necessary to cover the increasing costs at the various tier rates under the proposed water rate increase. (Note: Excel spreadsheets don’t import well into comment pages – but see below)

MBCSD EXPENSES: (Based on FY 17/18 Budget)
FIXED: $147,800 $147,800
REPAIR: $25,000 (normal repairs contributed to water use) $172,800
VARIABE: $20,000 (Treatment/electric)
TOTAL: $192,800 (operational costs) $192,800
Depreciation expense (UT) $12,000 (WCI replenishment cost for upper tank) $204,800 (currently charged but not being fully realized by T4)
MBCSD REVENUE: (Based on actual usage x current water rate increase)
BASE RATE: 156 $93,450 $93,450 (Covers $93,450 Fixed costs)
TIER 2 65 $60,700 BASE+T2 $154,150 (Covers $147,800 FC + $6,350 VC /Repairs)
TIER 3 30 $23,150 BASE+T2,T3,T4 $177,300 (Covers $147,800 FC + $29,500 VC /Repairs)
TIER 4 5 $15,500
TOTAL: $192,800 (BASE+T1,T2,T3,T4 $192,800 (Covers all Fixed + Variable + Repair)
WCI Fee: $50,300 (towards infrastructure capital improvement) Tiered Rates – Price p/gallon Analysis
TOTAL: $242,800 (total water Operations and Water Capital Improvement)
Running Running
Capital Water Projects: Price p/gal Avg p/gal Avg total
Sunset Way: $650,000 Base Rate 0.022 0.022 0.022
Lower Tanks: $350,000 Tier 2 0.0185 0.020 0.021
Tier 3 0.025 0.021 0.02
UPPER WATER TANK COST COMPARISON: Tier 4 0.032 0.024 0.021
As built 200,000 8  days $650,000 $300,000 $12,000 (per year – priced into T4)
Alternate 100,000 4 days $350,000

If you first look to the Tiered Rates – Price p/gallon Analysis, you will find that there is very little cost difference at each tier level due to the fact that the tiers are based on price per 100 gallons.  So basically, the cost of a gallon of water pretty much averages out to $0.02 per gallon at all tiers.

Then under the proposed rates, the majority of the water district’s fixed and variable operating costs (80%) are captured in the first two tiers of revenue (80%) and thus spread out equitably among all water users.  Then the full portion of fixed costs and variable production and treatment costs plus normal repairs (92%) are covered within the base rate and next two tiers of revenues (92%).  Then currently, all fixed costs plus variable costs plus total maintenance costs (100%) are captured in all four tiers of revenues (100%).  The introduction of the ever so slightly higher Tier 4 rates is to try to recapture the depreciation expense for the additional construction costs for the upper water tank that built-in the excess storage capacity needed to accommodate the highest volume water users, along with the fire requirements of the one commercial user, which was all needed over what would have been the necessary water tank size to accommodate the first three tiers of water users alone.  Right now that depreciation is not even yet being realized, as the district is just covering the costs of operations. The depreciation expense only effects the last two tiers ever so slightly, but if realized, should cover the $12,000 annual cost over the useful life of the Upper Water Tank.

As you can see, 100% of customers pay the Base Rate, and 78% of customers pay the Base Rate and some part of Tier 2 that generates 80% of the revenue towards covering 80% of the costs.  97% of all customers fall within the first three tiers with 19% sometimes reaching Tier 3 (but not usually by much) who together pay 92% of the revenue to cover 92% of the total costs.  And then of course 100% of all customers fall within all four tiers to cover 100% of the costs, with only 3% of users ever reaching Tier 4 and with that last 5% being mostly incremental variable costs or depreciation expensed (if realized) and is almost exclusively to the district’s one commercial customer for who the district was required to provide the accessibility to a certain volume of water for fire protection, as I understand it, and which was accommodated for when the upper tank was built.

I think in the future the district could look at trying to trim down to fewer tiers, but that would more likely result in a very small change, as currently there is very little difference in cost between tiers now.  I think it would not be impossible to find the balance in a three-tiered system as long as the depreciation expense still remains in the top tier  The actual trend in many water districts is to use more tiers, not less, but in a district with many customers falling into the same use patterns and classifications, that may not have much useful application for MB in the long run.  The district doesn’t have a lot a varying meter sizes, and it is trying not to discourage the fire protection need for the few residents who are required to have a slightly larger water meter to accommodate their fire sprinkler systems, and don’t generally, use any more water than the majority of households with the standard meter.  The district has just two water zones that are all gravity fed, for the most part, from a 60/40 split between lower and upper tanks respectively – with just a couple of homes needing pressure boosters – and the upper tank having the capability of feeding the system interchangeably from either direction .  All water gets pumped from the Wells to the lower tank and the cost to pump water to the upper tank is negligible in comparison.  But all costs and expenses are being looked at in the process of setting rates.

The CSD has been in consultation with an attorney that specializes in water law as needed, and he does not see anything non-conforming or illegal in the CSD’s current pricing structure or proposed rates, as the district can justify its tiers and costs, and has not built any punitive use charges or excessive fees into any of the rates.

The water district has done individual costing of the exact amount of management and itemized overhead costs for the water system and it actually comes out to 43.96%, so the 40% allocation is fairly representative of the water enterprise’s share of district management and overhead costs.  I think it’s hard for the general public that doesn’t live with managing a water system day-to-day to realize how much time goes into running and managing every aspect of the system: from production; to keeping track of testing and reporting; to monitoring treatment levels; to responding to emergency repairs and the coordination of routine repairs (especially for an extensive and aging distribution systems that includes many miles of water lines and mains of various ages and types); to a manually read metered billing system, leak detection, customer invoicing and billing; to customer service inquiries, water advice, on call help, research, and just all levels of communication around notifications; to even the time spent on this water rate increase.  And then from there, it just gets more complicated by the addition of the Banducci connection to the system, with a new State requirement to add a 4-log Inactivation permit modification to the existing system, and the time that it entails to work with both the State and Civil water engineers to bring the whole system up to a new level of the water code standards.  And also, to work with the NPS to monitor the creek to stay incompliance with our water permitting.  In short, water systems don’t manage themselves and there is a lot of work to keep a safe and dependable supply of drinking water delivered continuously to every doorstep and faucet, and to such a degree, that no one really notices how much is necessary to make it all happen.

The water district has not done the calculations for a single rate payer system.  Currently though, that would most likely result in a rate that would be higher overall for lower volume users than they are paying currently, and I don’t think it would be fair to have those customers pay for the excess storage cost of the highest users.  But that said, we are pretty close to a single rate right now at $.02 p/gallon.

Currently though, the CSD Water Committee is starting to explore a very different water pricing concept called “Aquashares” which is based on a single payer plan, but it will take a great deal of research and public education, along with the installation of a real-time water metering system (and additionally a computer hub or server), to introduce such a novel approach of water sharing to the MB community.  At the CSD Water Education Day, one of the guest speakers did talk on this concept and many residents in attendance conveyed that they wanted the CSD to look into this system further.  But as a whole, a radically different water sharing concept would take quite a bit of time to explore and will bring as many questions as it answers in the beginning, and may seem confusing, and perhaps, unwanted by many community members.  So, I believe, it would still take quite a bit of further investigative research and public education to get to a fair and equitable single payer or single rate system, but certainly the district should be looking at all long-term potential ideas and options to present to the community for logistical application, usefulness, and input.

Anyway, the district is aware they are operating under Prop 218.


Mary Halley – MBCSD Staff

Co-District Manager


Response to Richard S. Kohn, MBCSD staff

September 13, 2017
5 Ahab Drive
Muir Beach, CA 94965

Mary Halley
Muir Beach CSD
19 Seacape Drive
Muir Beach, CA 94965

Re: Proposed water rate increase COMMENT

Dear Mary,

Thank you for replying to my letter dated August 26, 2017.

Before addressing the merits of your reply, I want to register a protest about how the comments are posted on the CSD website. The current Board ran on a platform of transparency, but the website is anything but transparent. The heading water rate increase-comments shows zero comments. The comments can only be found by clicking on the water tank icon. When I finally found the comments and your responses and printed them out, the print was so small and indistinct that I had to use a magnifying glass to read them. Instead of facilitating public participation in this debate, the website is designed to foreclose the public from even being aware of the comments. This deficiency needs to be rectified immediately.

Regarding the merits, I note that we agree that in order to be valid, a tiered system must be able to justify the pricing at each tier level and that each tier must not charge more than the actual cost of service. Nor is there any disagreement that the cost of service may include production, distribution, maintenance, capital improvement for infrastructure and management costs. However, there we part company.

First, it is not correct to say that the cost of a gallon of water pretty much averages out to $0.02 cents per gallon at all tiers. The price per gallon, even if accurate, is not equivalent to the rates being charged to consumers at various tier levels. Prop 218 requires that the government be able to justify the cost of water at each tier. The proposed rates change depending upon the volume of water used: this is undisputable. The challenge for the CSD is to justify the differential rates created for each tier. It is sophistry to claim that the average cost per gallon is $0.02 cents.[1]

The fact that the first two tiers combined may yield approximately 80% of the fixed and variable expenses or that the first three tiers may account for 92% of the expenses is wholly beside the point. You can point to no facts distinguishing the cost of delivering water to any of these three tiers. Consumers in Tier 3 are simply paying more for water per 100 gallons than consumers in Tier 2. In fact, it appears that the rates for these tiers were selected precisely because they would raise enough money to pay for the lion’s share of expenses, a calculus the court in Capistrano disapproved as a justification for tiered rates.

With respect to Tier 4 you claim that the introduction of the ever so slightly higher Tier 4 rates is to try to recapture the depreciation expense for the additional construction costs for the upper water tank that built- in the excess storage capacity needed to accommodate the highest volume water users, along with the fire requirements of the one commercial user,  which was all needed over what would have been the necessary water tank size to accommodate the first three tiers of water users alone. If this could be quantified, it might satisfy the Capistrano standard. However, you offer no proof regarding what that additional cost actually was, either with respect to the construction of the tank or the cost of fire requirements for the commercial user. Again, in Capistrano the court disapproved distinguishing tiers based on normal and excessive use alone.

Furthermore, as Leighton Hills has recently pointed out, accelerating the depreciation of the water tank distorts the district’s expenses by several thousand dollars, which in turn undermines your argument.

In that connection, in your letter to me you state that $300,000 of additional cost of the $650,000 tank is being depreciated over its useful life of twenty-five years or $12,000 per year. [2] Assuming that this additional cost relates to the excess capacity needed to store water for the few Tier 4 users, a doubtful premise, it seems inconsistent with a point made by Leighton Hills. Leighton states that the full cost of the tank is being expensed over 15 years resulting in approximately $40,000 of increased expense per year. Whichever figures are accurate it would result in a significant reduction of expenses if, as Leighton says, the life of the tank is 100 years. Furthermore, if I understand your letter correctly, it would appear that you are depreciating the same asset twice.  I would appreciate it if you could clarify the meaning of the table in your letter in case I misapprehended your point.

Your analysis of the percentages paid by users in the various tiers is wholly beside the point. It is clear under Capistrano that the additional cost imposed on users in each tier must be independently justified with evidence and that merely demonstrating that mathematically the tiers will raise enough revenue to pay expenses is not enough.

I have difficulty seeing how your discussion of water meters and the upper and lower tanks aids your argument. You concede that there are few homes that need larger meters and that the cost of pumping water from the lower to the upper tank is negligible.

I must, as have Leighton hills and Leslie Riehl, take issue with your statement that the board has costed out the actual cost of management and itemized overhead costs attributable to water. One of co-district managers has nothing to do with water but his salary is no doubt being included in your calculation. And, as I have previously pointed out, several items listed in the budget actually state that they are for non-water activities. Suffice it to say, without seeing a very detailed listing of overhead costs, this assertion cannot be accepted at face value. I also appreciate the long list of the management responsibilities in providing safe and clean water to the community that you have provided. But that is why the community has engaged the services of salaried staff.

I wholeheartedly agree that it would be unfair for lower volume users to have to pay more for the extra storage capacity of the highest users. The problem is that the voters amended the state Constitution to add Prop 218 and the courts have said what it means. The Supreme Court was asked to de-publish the Fourth District’s decision in Capistrano which would have limited its value as a precedent. But the Court declined to do so therefore it is the law. By the way, isn’t it also unfair to double the flat rate in Tier 1 for the lowest users who may not even use 4500 gallons?

I am also mindful of your observation that other water districts are wrestling with the fallout of Capistrano. But like the person pulled over for doing 80 in a 55 mile an hour zone, the argument that everyone else was going 80 never works to avoid a ticket. In any event, each case must be evaluated on its own merit.

I am surprised that you were not advised to put the rate increase before the voters as a tax which would have avoided this whole problem. As you say, the board started working on this well over a year ago, so there was plenty of time to provide for such a vote.

I assume, since you have not answered the question I asked, that there is no written legal opinion justifying the proposed rate increase. When I was still actively practicing law, I sometimes would advise a client who was contemplating taking a questionable short cut to achieve an objective, imagine that you are in a deposition, under oath, and forced to defend your decision as a good way to take a clear- eyed look at what you are thinking of doing before you act!

Thank you for your consideration.

Richard S. Kohn

  1. Board members4

[1] In Capistrano, the 4 tiers were $2.47 per ccf up to 6 ccf; $3.29 per ccf from 7 to 17 ccf; $4.94 per ccf from 18 to 34 ccf; and $9.05 per ccf over 34 ccf. A ccf was 100 cubic feet or 748 gallons. Thus, it is the measure of the unit that is relevant, not a calculated average price per gallon.

[2] I understand that this refers to that portion of the $650,000 cost of the tank which you attribute to the excess capacity needed to supply high user consumers of water.

Richard S. Kohn