Fear and Loathing on the MidCoast

For some months, HMB has been asking for a switch to separate accounting for Capital Projects, and including infrastructure funding such as investments for IPS asset replenishment in that reorganization.  I recognize some benefits from this method of accounting, and will in fact write a paper on how focused consideration of the perpetual costs of assets can improve the governance and fiscal sustainability of Public Works agencies.  However, another birdie tells me HMB’s interest in this was stimulated by their lawyers, who advised delaying approval of the SAM budget at the April 26th SAM Board meeting until this accounting redefinition was agreed.  There is a provision in the JPA agreement that “project budgets” are discretionary for member agencies, and can be “opted out of”.  [The early 2017 plans for Recycled Water would have been treated in that manner, as an optional service.]  The original General Budget, however, is mandatory participation and agencies which do not participate can lose their governance rights.  So, if HMB had refused to fund the continuing operation of the foundational SAM budget, it could have lost its Board seats, and the remaining agencies could have set the terms and rates going forward. When HMB realized this, they agreed to continue funding the IPS asset replenishments, but “under protest” so that if they win the lawsuit, their share of the disputed monies (currently 58% based on flow) must be refunded to them.

Had this accounting change been a good faith suggestion by HMB, it would have included several things: 1) a specification of which General Ledger accounts (assets, liabilities, income and expense categories) were being moved or created and how historical financial statements would be restated under the new method, 2) a specification of how the newly reorganized accounting would be used to make decisions and assess fiscal status, and most fundamentally: 3) a statement of the expected benefits to SAM and its members from the accounting reorganization.  I will certainly cover those topics in my future article on separating Capital Accounting for Managing Fiscal Sustainability.  However, to my knowledge, no such details were provided to SAM for discussion.   Failure to include those necessary details is like ordering a car, specifying the color, but failing to mention how many doors, what engine and drivetrain, you want. Thus, I must conclude…

The accounting reclassification ploy was an attempt to begin to unravel the legal basis that the other two agencies have for the IPS being an essential and integral part of the foundation of SAM’s system.  Had IPS work been segregated, HMB could have used that as partial precedent that they should not be required to fund the pipes, tanks and pumps of the IPS.  Fortunately, at the meeting, SAM counsel raised a concern about this reclassification, based upon his knowledge of the JPA, and subsequently issued a formal opinion, making it clear that such reclassification is not allowed under the current JPA – it would have to be part of a new, renegotiated JPA (which might be one result of the lawsuit).

Moving Forward – Together?

None of this is to say ill of the vast majority of HMB residents, who are good people. Further, City Management seems MUCH improved with the recent addition of Bob Nisbet as City Manager. It is completely understandable that the City, desperate for funds when the Beechwood lawsuit was hanging fire, would try to conserve costs. However, the costs they are conserving are not the City’s, but those paid by sewer ratepayers, and their bullying attempt is a zero-sum game which is trying to shift a financial burden to the Midcoast.  The lawsuit stems from longstanding members of HMB leadership who are willing to bet the better part of a million dollars of their taxpayers’ money that they can re-interpret the longstanding terms of the JPA contract in their favor.

Most fundamentally, the benefit of the IPS to HMB was and is the creation of a modern sewer system which resolved the community’s pollution violations and allowed it to continue to grow and prosper.  The state-mandated creation of the JPA also allowed grant funding, and lowered the costs for all members in construction, procurement, and operation of a joint sewer collection and processing system.  There are specific additional benefits from the IPS to HMB, which they are denying, but which are in beneficial operation for HMB residents every day^[*].  Also fundamental to all Coastside residents is that this lawsuit has delayed and increased the costs of needed projects (like the current Wet Weather Storage project on the Burnham Strip), and has distracted from a focus on very needed new projects like Recycled Water – in fact, specs for that project were agreed about a week before HMB filed the lawsuit in July, 2017.  We could all have been working on a partial solution for this impending drought for the last four (4) years, and instead are arguing over a new interpretation of a 45 year-old contract.

Until this lawsuit is withdrawn by Half Moon Bay, or they lose it, consider doing your shopping and dining in Pacifica. For one thing, they need your business. For another, the leaders of Half Moon Bay do not deserve it.

FOOTNOTES:

[*] IPS benefits to HMB
See slide 5 of the MCC presentation: MCC 5/26/21 HMB-SAM Lawsuit Presentation