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What happened to the $2.7m in the Central Basin Water District's trust fund?

The FBI is investigating what happened to $2.7 million placed in a trust fund by the Central Basin Municipal Water District, money that also has been the subject of questions from one of the district’s board members and been described by another as a slush fund.

Central Basin — which serves more than 2 million customers in 24 southeast L.A. cities and is governed by a five-member board — set up the trust fund to pay for an environmental impact report (EIR) for a water storage project. In August, the U.S. Attorney’s office served a subpoena asking Central Basin for documents "regarding any trust account used to facilitate payment for the EIR."

Board member Leticia Vasquez of Lynwood said she began asking for details on the trust fund soon after she joined the board in late 2012. Board members manage Central Basin’s $30 million budget and oversee water distribution to the service area. They can earn up to about $37,000 a year, including car and communication allowances. 

"My colleague [and fellow board member] Art Chacon made mention of [a] slush fund" in a January 2013 board meeting, said Vasquez. "In February, … I started asking questions."

Related Material: Central Basin and other documents obtained by KPCC

A November deposition of former Central Basin General Manager Art Aguilar provided some details about the trust fund.

While being deposed in an unrelated case, Aguilar testified that Central Basin wanted to create a water storage plan but knew it would be controversial. "Every time there’s a storage plan that comes up, there’s a lawsuit," he said.

Aguilar then said the board wanted to prepare an EIR that would survive objections, but added, "they also didn’t want anybody to know what we were doing, which is very difficult for a public agency."

In the deposition, Aguilar claimed that Central Basin’s attorney – whom he didn't name – suggested managing the storage plan "under pending litigation" and that it be managed through the attorney’s law firm.

Labeling a plan as "pending litigation" shields it from public scrutiny.  Officials at Central Basin couldn't say if the storage plan and the EIR were directly linked to ongoing or anticipated litigation.

Aguilar said Central Basin established a trust fund "from which everything would be paid and all the decisions and all of the discussion would be done under closed session," including requests for proposals, contracts and expenditures.

He described the handling of the trust fund as "the same process as we normally would [do], except that it wasn't done in public."

Central Basin records obtained by KPCC show the $2.7 million was transferred in a series of three wire transfers in 2010 and 2012 to two law firms, Sedgwick LLC and Buchalter Nemer. Those firms used the money to hire various vendors. 

The water district's general counsel at the time was Doug Wance, who also worked at Sedgwick, and subsequently at Buchalter Nemer. When contacted about this story, Wance had no comment, beyond saying everything done by Central Basin in connection with the trust fund was legal.

RELATED: Timeline: The FBI's investigation of Ron Calderon

Sedgwick did not return a call seeking comment. 

According to one wire transfer report, Central Basin sent $1 million to Sedgwick on June 28, 2010. However, there is no written documentation of this transfer or approval of it on any board agendas, in board minutes, or on Central Basin's official list of expenditures for the month, known as a warrant list.

Another wire transfer report documents a $1 million payment to Buchalter Nemer on January 18, 2012; however, the transfer is not on Central Basin's warrant list for that month. 

A third wire transfer report shows a $750,000 payment on March 26, 2012 to Buchalter Nemer. The water district's warrant list for that month does show a $750,000 payment  for "legal services," but gives no further details.

Board Member Vasquez said she has not been able to find any records showing that the actions taken behind closed doors were publicly addressed. She has repeatedly questioned if the handling of the trust fund violated the Brown Act, California's open meeting law.

"It’s a public agency and public agencies are bound by specific laws that forbid public agencies to do business behind closed doors," Vasquez said. The EIR eventually was made public and can be viewed on Central Basin's website. 

Doug Johnson, a local government affairs expert with the Rose Institute at Claremont McKenna College, strongly questioned Central Basin's behavior.

"I had this picture as I was reading [about the trust fund and the EIR] of a football field, and the entire field is covered in penalty flags," said Johnson. "Again and again, you just see problems.

"The state controller, as they did in Bell, needs to come in and look at these books," Johnson added. "Probably the state bar needs to look at the legal advice that's been given here. The county district attorney needs to look at the Brown Act violations."

Public records request

Vasquez said that, despite making repeated requests, she couldn't determine who was paid through the trust fund, who approved the payments, or what work was done. "I had to hire an attorney to help me get access to the documentation," Vasquez said. She filed a public records request with Central Basin.

Vasquez eventually got records, but they didn't include invoices or receipts showing how the $2.7 million was spent. Records do show that one of the vendors hired by Sedgwick and Buchalter Nemer was Tom Calderon, a former state assembly member who is the subject of an ongoing FBI investigation. The FBI has asked Central Basin for all records involving Calderon and the trust fund.

It's unclear if Calderon was paid out of the trust fund, and that troubles Vasquez.

"I just didn’t understand what he brought, what work product or skill he brought to the table," she said.  "He was already a consultant for Central Basin."

In 2010, the water district already had a contract to pay Calderon $140,000 for consulting services. After renewing the contract in 2011 and 2012, Central Basin terminated it earlier this year.

Calderon did not respond to KPCC’s calls seeking comment.

Current board members Art Chacon and Phil Hawkins were in office when the trust fund was formed. 

Chacon acknowledged referring to the trust fund as a "slush fund." When asked why, he said, "because there are some things going on that I don't remember, and not only myself, other directors and former directors don't on such issues. But, once again, I can't say what they are." 

Phil Hawkins declined comment, saying he could not discuss the trust fund because Central Basin has hired an investigative firm to find out what happened to the $2.7 million.  The investigative firm, Arent Fox, was hired in March and has billed Central Basin more than $300,000, said Central Basin spokesman Joseph Legaspi.

Arent Fox's work also involves other litigation issues, said Legaspi.  The firm has yet to deliver a report on what happened with the trust fund, although one is expected in a few months.

Central Basin's legal fees came up at Tuesday's board meeting. For the past three years, legal fees have gobbled up a big chunk of the water district's budget, sometimes as much as 26 percent. The district's financial director told the board it may have to dip into reserves to pay for this month's legal bills.

The questions about the $2.7 million in trust fund money don't make the situation any better, said Vasquez, adding,  "How could 10 percent of our operating budget be secretly transferred out of the public coffers without any accountability, without any public disclosure?"

Claremont McKenna's Johnson hopes the public pays attention to this story.

"These water districts, which spend hundreds of millions of dollars a year, are making these decisions with almost no public attention. And it's the public's money. Every month every household gets their water bill, and this is where your money goes."