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Baca Legal and Management Fees

Concerns have been expressed by a few members of the community through various emails regarding the fees paid in 2009 to the District’s legal and management team.  This communication is intended to provide factual information in response to these concerns.

 
Communications regarding legal and management fees for the District contend that these consultants were paid $500,000 in 2009.
 
RESPONSE:
 
Please be aware that the summary of fees that is being circulated around the community and attributed to legal and management for 2009 is misleading. First, the fees which are referenced are for 18 months of services, not 12 months of services as people contend.  Further, they are comprised of many different facets of services and not simply limited to traditional legal and management services.  For example, accounting services, capital project management, property acquisitions, water rights, employment matters, elections, audits, operational compliance and other services are provided by the legal and management team.  When this information is accurately reviewed, one will discover that, for 2009, legal and management services were $268,345.  Of that, $102,986 was attributable to obtaining $4.5 Million in public financing and capital projects and $165,359 was attributable to rectifying years of non-compliance with State laws and rescuing the District from the brink of bankruptcy.  Given the extraordinary circumstances the District was facing at the time, the Board directed the legal and management team to proceed with the District’s resurrection.  As such, the costs incurred by the District during 2009 were as unique as the situation itself.
 
In order to fully understand these fees, it is important to understand the background of the management and legal services which were provided at the direction of the Board.  This overview is lengthy but provides a factual background to the roles of the legal and management team as well as the costs associated therewith.  The District’s financial statements, which are posted on the District’s website (www.bacawater.com), confirm the information set forth herein.  Further, a summary showing the audited numbers for 2002-2008 and the unaudited numbers for 2009 is also posted on the District’s website.

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DISTRICT V. PROPERTY OWNERS’ ASSOCIATION:
Special districts are quasi-municipal corporations and political subdivisions of the State of Colorado (local governments) which are governed by State statutes and the State constitution.  On the other hand, property owners’ associations are non-profit entities.  It is impossible to compare the needs of one with those of the other- it is simply a comparison of apples to oranges.  As a governmental entity, the District is held to higher standards of scrutiny and is required to comply with dozens of compliance matters each and every year in all aspects of District administration including, but not limited to:
·          Financial reporting
·          Budgeting, taxation and annual appropriations
·          Issuance of debt and oversight of such obligations
·          The conduct of Board meetings
·          The award of contracts
·          Compliance with the drinking water and wastewater regulations
·          The conduct of elections
·          Employment regulations specific to governmental employees
If these compliance matters are not met, the District is in violation of State law and can have severe penalties assessed which ultimately adversely impacts the District’s customers and taxpayers.
 
DISTRICT MANAGEMENT TEAM:
The District’s Management team, Special District Management Services, Inc. (“SDMS”), was engaged by the District in June 2008.  The Board selected SDMS because they specialize in the management of special districts in the State of Colorado and are experts in the area of managing public entities and water and sanitation districts in particular. 
 
As the District’s consultants have worked to resolve the issues facing the District, numerous ancillary issues have been discovered which were unknown at the time of engagement.  In April 2008, the District was on the verge of financial collapse as it was not generating enough revenue to cover its operating costs (staffing, utility billing, repair and maintenance of old and deteriorating water and sewer system, etc.) that are necessary to meet State mandated service levels and meet its debt service obligations.  Correcting the numerous governmental compliance and financial problems has required a tremendous amount of work by the Board of Directors, Staff and Consultants.   Much progress has been made, but there are still challenges facing the District, which must be addressed before the District can return to normal operations.

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LEGAL TEAM:
In August 2008, the District engaged White, Bear & Ankele as general counsel to the District.  White, Bear & Ankele specializes in the organization and on-going representation of special districts and has done so for over 25 years.  As with management functions, there are many legal nuances facing the District which require specialized advice.  If the proper advice is not sought or obtained, the legal consequences to the District are immense.  After being engaged by the District, White, Bear & Ankele discovered legal violations plaguing the District from the simplest of things, such as violations in the basic conduct of meetings, to the more complex matters such as the need for an immediate understanding of complicated water rights that was necessary to maintain service to residents and property owners without suffering an interruption of service, while simultaneously developing a long term maintenance and repair plan, non-existent property interests, lack of agreements, non-compliance with bidding requirements for construction contracts and failures to properly document District business.  Unfortunately, the correction of such errors is more complicated than starting with nothing, but it was a task that White, Bear & Ankele was challenged with and which it faced head on.  These errors continue to be corrected by White, Bear & Ankele as they are discovered.  In addition to White, Bear & Ankele, the District has engaged special counsel for water rights matters and employment matters.
 
The following is a brief summary of a select few of the matters that the District has faced over the past 18 months.
 
FINANCIAL:
Prior to SDMS’s involvement with the District, the District’s accounting and billing system were insufficient to provide reliable reporting, as required by generally accepted accounting principles and State reporting requirements.  As a result, the District had not received a clean audit in 2 years and was issued formal deficiencies regarding its internal controls and capital assets reporting.  The District was at risk of having property taxes withheld by the State due to its failure to timely file its annual audits with the State Auditor.  Financial statements for years 2007 and 2008 had to be reconstructed in order to correct these deficiencies and have a clean, unqualified opinion issued for 2008.  Due to these past qualified opinions, the District was unable to obtain or borrow funds to finance operations.  Had a clean opinion not been issued for 2008, the District would have been precluded from obtaining its 2009 General Obligation Bond issue.
 
Several years of financial information was reviewed and through extensive research substantial amounts of missing information was re-created.  In order not to impact the cash flow of the District, SDMS and White, Bear & Ankle agreed to limit monthly billings and carry the balances due on their invoices until the District had adequate funds to pay for the services.  Past due amounts were carried for over 9 months with no late charges or interest imputed.
Certain members of the community contend SDMS has not trained local people to take over some of the functions that SDMS performs as originally promised.  This is false.  In fact, over the course of the past 18 months, SDMS has trained local staff to process the monthly claims and handle all billings for customers.  As a result of this effort, collections were improved and accounts previously not charged or under-charged were identified and corrected.  This has saved the District thousands of dollars of consultant time while providing two very smart and engaging people with full-time positions at the District.

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PUBLIC FINANCING FOR CAPITAL NEEDS:
The District faced (and continues to face) significant capital needs due to aging infrastructure, inappropriately constructed infrastructure and the growing needs of the community.  In order to pay for the design and construction of these improvements, the District required substantial financing.  The time at which the financing was needed coincided with the economic downturn and turmoil in the financial markets.  Furthermore, the District would have to provide a “clean” audit and demonstrate the technical, financial, and managerial capacity to qualify for funding.  The District’s consultants were able to secure the following sources of revenue for the District.
 
1.       Bond Issuance.  The District’s Consultants worked with numerous banks to find financing but there were very few opportunities at the time despite the District’s healthy tax base.  The consultants worked for months to provide the disclosure information that would be required for a public bond offering.  Initial discussions with potential purchasers had interest rates at 9% which was greater than the voters had authorized, and, therefore, the District could not enter into such obligations.  The District was made an offer at 8% but, after months of negotiations and document preparation, the potential issuer withdrew. Finally, the District was made an offer of approximately $3,105,000 in bonds at a rate of 5.25% for the first five years and with a mandatory increase in the interest rate to 8.5% in 2014.  However, the issuer would not provide the financing without assurance from the CDPHE that the potential fines would not bankrupt the District.  At the same time, the CDPHE would not place a maximum dollar amount on the final amount of the fines.  The District was faced with the classic chicken and egg situation.  Through extensive negotiations, the District’s consultants were able to come to an agreement with the CDPHE to limit the fines to $250,000.  This, along with an extensive tour of the facilities and disclosure of all aspects of the current operations of the District, gave the bondholder the confidence necessary to move forward with the issuance.  The bonds were issued in May 2009 with many contingencies attached, including the requirement to have clean, unqualified audits on an annual basis and continue to operate the District’s systems in accordance with State regulations.
2.       State Agencies.  The District’s consultants simultaneously worked with the State to take advantage of low interest loan programs and grants.  The District’s consultants provided numerous lengthy submittals to the State to qualify for the programs over several months.  To date the District has obtained grants from the State Revolving Fund and the Department of Local Affairs totaling $305,000 and has submitted an application for an additional $10,000 to explore the possibility of utilizing hydroelectric power production.  In August 2008, the District received a 2% loan from the State Revolving Fund in the amount of $1,483,750 to finance various water projects in the District.

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CONSTRUCTION:
The District’s consultants and engineers have worked for months to design improvements that meet the specifications required by the CDPHE and that will also satisfy the requirements of funding sources.  The Bonds, Grants, and State loans have specific design and construction requirements tied to their use.  Failure to comply with these requirements will jeopardize the financing.  The District recently received bids for the capital projects and has issued a Notice of Award to the low bidder.  The District expects to begin construction on 6 capital projects this spring once final design review by the CDPHE is complete.  Oversight of the projects will be an ongoing matter through completion of the projects.
 
OPERATIONS:
When SDMS and White, Bear and Ankele were engaged by the District, the District’s operational staff was telling the Board how to run the District.  In August 2008, the staff made unrealistic demands on the Board and subsequently walked off the job leaving the District with a public health crisis.  At that point, SDMS made recommendations to the Board to assist the Board in hiring the new staff and operators necessary to avoid a crisis.  New staff members were hired and trained and a licensed Operator in Responsible Charge was engaged as required by the CDPHE.  
 
District Management and accounting services continue to be performed by SDMS.  General Management of the on-site staff, facilities and daily operations is performed by Steven Harrell, a resident of the Baca community.  The District is currently establishing a comprehensive set of Rules and Regulations as well as Operational and Administrative manuals.  In March 2010, the District adopted a comprehensive Employee Handbook tailored to the specific needs of the District as well as a Safety Manual to assist the operations staff with daily functions in the safest manner. 

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REGULATORY COMPLIANCE:
In the spring of 2008, the CDPHE issued two Cease and Desist Orders to the District­one for the District’s lagoon and one for the Aspen wastewater treatment plant.  Fines of up to $10,000 per day, per facility, are currently accruing from the time of initial violations were identified by the CDPHE (in 2007) and until the facilities are shown to operate in compliance to the satisfaction of the CDPHE.  Correcting the failures requires capital improvements which, in turn, require capital funding.  The District’s legal and management team successfully negotiated with the CDPHE to limit the fines the District can face for BOTH facilities to a combined amount of $250,000.  This is a savings of millions of dollars to the District.  Further, of the $250,000 fines, the District can use half of the money to fund “green” projects within the District benefiting the lagoon and wastewater treatment facility.
 
ONGOING SERVICES:
The ongoing role of specialized legal and management consultants is imperative to the District’s continuing success.  The District has explored the option of having legal and management attend the meetings remotely to reduce costs.  However, technical difficulties with the limited services provided to the Baca community as well as the importance of having legal and management attend the meetings in person for specific topics at hand has resulted in them attending most meetings in person.  To minimize the financial impact to the District, SDMS has reduced travel costs for meetings and White, Bear & Ankele has written off travel time in total for many of the meetings.  Outside of travel time, the costs associated with consultants’ attendance by phone or in person is the same.  SDMS and White, Bear & Ankele continue to work with the District to minimize meeting attendance costs for the District.
 
Both SDMS and White, Bear & Ankele have written-off and no charged significant amounts of money for services provided.  White, Bear & Ankele has written off/no charged $15,000 over the last 18 months.  This does not include the many services that they have performed by administrative assistants which are not charged to the District. Over the course of the past 18 months, this is an additional value to the District of over $10,000.  In total, the District has received over $25,000 in free legal services in the past 18 months.  For SDMS, it has written off/no charged $17,000 over the last 18 months.  Combined, the District has received over $42,000, combined of free legal and management services.
 
In sum, the value that SDMS and White, Bear & Ankele have added to the District, the sources of funding discovered and secured by them and their overall investment in the Baca community as a whole far outweigh any professional fees paid to them over the last 18 months.  They have repaired previously irreparable relationships in the community and become an invested part of the District and community at large.