CLPOA claims EVMWD owes it more than $6 million

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The Canyon Lake Property Owners Association is still waiting for a response from the Elsinore Valley Municipal Water District with regard to a February 18 notification asking for the return of $6,231,134, plus interest at the legal rate, that it believes EVMWD overcharged the CLPOA on the Lake Lease.

Nancy Horton, Canyon Lake’s newly elected representative to the EVMWD Board of Directors, says she cannot comment on the lawsuit. Greg Morrison, director of legislative and community affairs for EVMWD, says, “We received the claim and are considering our options. We have 45 days (until April 3) before we have to act on the claim.”

At the CLPOA Board meetings in February and March, the Association’s Legal Counsel, Scott Levine, provided information about the status of negotiations on the Lake Lease. In his February presentation, Levine gave an abbreviated history of the Lake Lease as follows:

• 1968 – Original Lake Lease: Lessor, Temescal Water Company; Lessee, Temescal Properties (it was signed by the same people). The term was 55 years (until December 31, 2022), with a Base plus Cost Increase Formula. Base Rental Year 1 was $36,000; Year 2 was $47,000; Year 3 was $77,000; Year 4 was $61,000.
• 1969 – First Amendment: Lessee Temescal Properties assigned the least to the Corona Land Company. Added to the lease was Skipper’s Island and Lighthouse Island.
• 1970 – Second Amendment: This agreement was between the Canyon Lake Property Owners Association and Temescal Water Company. The option was added to extend the lease 44 years, commencing January 1, 2023 (expiration of current term).
• 1974 – Third Amendment: Modified the area of the reservoir available to the CLPOA.
• 1984 – Lawsuit. The CLPOA filed suit against Temescal Water Company. The case was in trial when a settlement was reached. Parties agreed to the 4th Amendment that would follow in 1989.
• 1989 – EVMWD acquired Temescal Water Company for $11 million. It was a “friendly” eminent domain action. The lease between the CLPOA and Temescal now became a lease with EVMWD. EVMWD assumed the litigation with CLPOA.
• 1989 – Fourth Amendment: First agreement/amendment with EVMWD reached in the trial. Trial argued that the lease was unfair to the CLPOA. CLPOA argued that Temescal entered into an agreement with itself, at the detriment of the CLPOA.
• 1993 – Offer to sell lake. EVMWD was negotiating with the CLPOA to sell the lake to CLPOA for $7 million, paid over 20 years ($712,965.46 per year (interest 8 percent per annum), plus annual maintenance fee of $75,000, plus Consumer Price Index (CPI) Increase. (The sale did not take place.)
• 1995 – Offer to fix lease rate: The offer was to fix the base at $811,000; adjust by CPI, plus the cost of water purchased to bring the lake level to 1,377.57 msl. The CLPOA declined because it was concerned about Base + CPI versus using a different water rate that could bring down the lease price. There also was concern about treated water mixed with the lake without lowering the lease price.
• 2009 – Memorandum of Understanding: EVMWD changed the water rate from “Lowest current price per acre foot for water available for purchase by Lessor” to the “Tier 1 rate for full service untreated volumetric cost set by Metropolitan Water District.” Lake lease escalation versus CPI and COLA.
• 2013 – Negotiations began to discuss the duties of the CLPOA versus the duties of EVMWD with respect to maintenance of the lake. For example, “If you lease a house, who pays for fixing a broken toilet? Who replaces the carpet when it wears out?” In other words, what is EVMWD supposed to do as the landlord? What is CLPOA supposed to do as the tenant? Is the Lake Lease like a house lease?
• Current – EVMWD offered a 5th amendment to change the Rate Escalator from Tier 1 to CPI, with a base rent of $1,455,000 (see the presentation for formula and provisions).

What the Association is questioning is why EVMWD wants to charge so much for rent when there is no reasonable basis for the charges. Levine explained the costs incurred by EVMWD over the course of the lease thus far:

• Mortgage on the dam improvements – $980,000 per year paid off in full as of February 2015
• Misc. costs – $20,000 per year
• Water purchases when the lake level got too low in 1999 ($708,900), 2002 ($248,462), 2005 ($5,147), 2008 ($833,263) and 2011 ($913,837).

In his presentation at the CLPOA Board of Directors meeting on March 3, Levine went over Proposition 13, which provides a limit on property taxes; Proposition 218, which provides a limit on new or increased taxes; and Proposition 26, with tax imposition limits that apply to EVMWD. He explained that local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.

Levine says that, since the constitution was amended in 2010, the CLPOA has paid EVMWD $6,231,134 as follows:

• September 2014 to Present 2014: $751,605
• September 2013 to August 2014: $1,460,345
• September 2012 to August 2013: $1,433,045
• September 2011 to August 2012: $1,340,509
• September 2010 to August 2011: $1,245,630

Levine once again explained that, since 1999, EVMWD has spent a total of $2,709,609 to purchase water to fill the reservoir to the 1,372 ft level agreed upon in the lease. But then EVMWD sold this water to its customers, including Canyon Lake consumers.

The EVMWD mortgage for the dam was $980,000 per year until January 2015; but, as Levine pointed out in his presentation, “the dam is to maintain the reservoir so EVMWD can capture and sell water to its customers.” Other than than that, EVMWD records show it spends about $20,000 per year on miscellaneous costs.

So what is the “reasonable cost” to maintain the lake? According to Levine, EVMWD must prove this amount.

In a press release dated February 27, 2015, the CLPOA stated the following:

“On February 18, 2015, Canyon Lake Property Owners Association (CLPOA) notified Elsinore Valley Municipal Water District (EVMWD) that it was making a claim for the return of $6,231,134 plus interest at the legal rate.

“In 2010, the voters of the State of California passed Proposition 26, which made the charges imposed by EVMWD an illegal tax. Proposition 26 amended the California Constitution to add Article 13C.

“EVMWD Board President Phil Williams indicated that EVMWD had made an offer to CLPOA and was awaiting a response. He termed this as being in ‘negotiations’ with CLPOA.

“While EVMWD may believe that it was negotiating, from the perspective of CLPOA, EVMWD was not. CLPOA Board President Dave Eilers said, ‘EVMWD was dictating the terms of the agreement and coupling it with an extension for an additional 44 years, taking the term to December 31, 2066. Given an 8% compounded increase per year, the total amount spent on the lease over the 50 years would be over $833,000,000. Even at an increase of 5%, the total cost to the members of Canyon Lake would exceed $300,000,000, over the 50 years of the lease. [pullquote]Under the current rate and scheduled increases, the cost per year will exceed $3,000,000 in less than 10 years and over $6,700,000 in less than 20 years. It is not possible for CLPOA to continue to pay this amount of money to EVMWD given the minimum cost that EMVWD incurs as a result of CLPOA’s use of the lake.’[/pullquote]

“EVMWD’s total cost to maintain the lake, according to EVMWD’s own public records, is less than $20,000 per year. Even if we were to assume that that too will increase at 8% per year, the total in 10 years would be just over $43,000 compared to an annual charge of over $3,000,000. This could be the single largest tax levy in the state of California!

“In addition, EVMWD added an Indemnity clause that spans three pages of the proposed Amendment that it offered. This Indemnity clause is overly broad and overreaching to the point that CLPOA cannot obtain any type of insurance to even begin to cover the potential responsibilities that this clause alone creates.

“When asked in a meeting to discuss the proposed Amendment to the Lake Lease, EVMWD’s response was basically ‘take it or leave it.’ EVMWD would not agree to a reduced base. EVMWD would not agree to modify or delete the indemnity provision. They told us that we could take it or leave it. Assuming an average CPI increase of 5% per year, CLPOA would still be paying well over $2.3 million per year in less than 10 years and more than $3.8 million per year in 20 years!

“Eilers pointed out that, ‘In prior years, CLPOA has pleaded with EVMWD to explain why CLPOA should be paying close to $1.5 million each year (escalating about 8% per year compounded). EVMWD represented that it would prepare an education series to the membership of CLPOA. This education series never materialized. CLPOA asked EVMWD to justify the charges, yet the only thing that CLPOA got was an extension agreement that seals the minimum cost to $1,455,000, escalating upwards at a compound rate.’

“In addition, EVMWD does not agree to even maintain the levels of water of the lake at levels that make it viable for recreational use. If EVMWD fails to maintain the water levels (for more than 10 days), it is penalized only 1/365 of the annual charge imposed to CLPOA for each day that the lake is not maintained at 1,372.

“Coupled with the Indemnity clause demanded by EVMWD, CLPOA would face the potential of losses to its members should EVMWD fail to maintain the lake level at 1,375 as is currently agreed by a ‘Gentlemen’s Agreement.’ Unfortunately, EVMWD does not believe that such an agreement exists. Under the indemnity agreement, if a homeowner were to sue EVMWD, CLPOA would be responsible. EVMWD essentially insulates itself from any liability related to the lake while taking in annual payment imposed upon CLPOA in the millions of dollars per year.

“To make matters worse, EVMWD is not allowing its full board to be involved in the negotiations. Last year, before his term expired, EVMWD counsel informed long time EVMWD Board Member Ben Wicke that he could not participate in any discussions related to Canyon Lake’s use of the lake. Given that Mr. Wicke’s term was about to expire and he was not seeking re-election, no issue was made as there was nothing yet to discuss.

“In November 2014, the voters of the water district elected two new members to the EVMWD board of directors. One of these members lives in Canyon Lake and ran to be on the board specifically to be involved in these discussions. That board member is former Canyon Lake Mayor Nancy Horton.

“Upon Nancy Horton’s election to the EVMWD board, she was immediately cast aside by EMVWD and told that she could not participate in anything related to Canyon Lake. In addition, we understand that the other newly elected member was also told that he could not participate in any discussions regarding the lake.

“If EVMWD wants to negotiate, then why are they removing two of the five directors that serve the District? It seems that EVMWD wants to ensure that it has three board members who want nothing but the status quo and no changes to the fees that it imposes upon the members of Canyon Lake. EVMWD is intentionally trying to stack its board with unequal representation of the members of the District. Why?

“While Mr. Williams is correct that in a past lawsuit, the Association did not fare well, times have changed. Armed with the California Constitution (which did not affect the prior litigation), the Association now has the ability to stop the unnecessary imposition of taxes by EVMWD.

“This lease was never intended by the original developers of Canyon Lake to be a profit center for the owner of the lake. Rather, the lake was simply a reservoir that could be used to keep water that was then used to water orange fields. The water, while being kept in the reservoir, was deemed suitable to build a community around it that centered upon boating and other water recreation.

“In 1989, EVMWD became the beneficiary of the reservoir by Eminent Domain. The same rules that allowed the government to take this property into the hands of the public now govern EVMWD. Proposition 26/Article 13C of the California Constitution prohibits what EVMWD is doing.

“Eilers said, ‘CLPOA’s Board of Directors’ goal is to have one of the following happen: (1) A Judge can decide if the amount charged violates the California Constitution; or (2) EVMWD can negotiate on an even field with CLPOA for a fair rate that is not going to burden the members of CLPOA nor benefit EVMWD’s balance sheet by well over $1,800,000 per year.’

“Eilers also said, “When EVMWD wants to come to the table to negotiate, CLPOA is ready, willing and able. If EVMWD wishes to send a take-it-or-leave-it modification, then this action will continue.’”

See presentations at www.canyonlakepoa.com.