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District in disarray: The San Simeon CSD discusses divesting water and wastewater services due to millions in capital project costs 

Since early 2023, the San Simeon Community Services District (CSD) has been in a tailspin.

"We are in the middle of a crisis, and there is no way for this to work unless we get help," interim General Manager Patrick Faverty told the board at the last meeting on Feb. 1. "I am urging the board to pass an urgency resolution to begin the efforts of divestment."

Residents of the small coastal town just south of Hearst Castle have witnessed their special district struggle to provide water, wastewater treatment, road repair, and consistent leadership. The resolution Faverty was advocating for would mean the San Simeon CSD would remove one or more of its responsibilities to transfer to another entity—in this case, San Luis Obispo County.

"[The county] has never seen anything like this happen before in SLO," Faverty told the board.

He explained that the CSD doesn't have the funds to pay for its wastewater treatment plant relocation and fix a crumbling stairwell and a broken pipe bridge. He added that the district told the California Coastal Commission it would begin work on some of those projects almost five years ago.

Divesting water and wastewater responsibilities is the only way for the district to continue functioning, the interim general manager said. However, the district board members felt the financial information that fueled Faverty's concern was not enough to warrant immediate action.

"I want to see the financial reports we are citing," CSD board member Jacqueline Diamond told Faverty at the meeting. "I think we need more information before we are ready to make a vote."

The board delayed its decision to the March 7 meeting, despite Faverty urging the district to begin the divestment application process immediately.

"We have $1.4 million in our reserves, [and] we have been able to run things with what little we are bringing in," he said on Feb. 1. "Unless you believe there is some way for us to finish the around $20 million worth of work we need to do, ... we can't handle any of it right now."

Divesting is a nine-to-12-month process through the San Luis Obispo Local Agency Formation Commission (LAFCO) that requires studies from the CSD, SLO County, and LAFCO.

The San Simeon CSD cannot wait that long, Faverty said. It needs to find a way to slough off some of the district's responsibilities and costs soon. If LAFCO doesn't approve the application, he said that funding those commitments could come out of residents' pockets.

"If there is a way to cover the cost without raising rates, we need to speed this process up," Faverty told the board. "Otherwise, we are stuck."

Services scramble

The San Simeon CSD was created in 1961. Residents on the strip of land along Highway 1 south of Hearst Castle voted for a special district to take care of street lighting, water, wastewater treatment, and street maintenance.

"I don't think some people realize, but the district has been around for an extremely long time, and some of the problems we are facing are not new," Faverty told New Times, noting that most of these current issues started nearly a decade ago.

Since 2020, the CSD has been unable to hold board meetings in a consistent location—with two of the most recent meetings being held outside of the town altogether, in Cambria.

Faverty spent most of December 2023 and January 2024 compiling a comprehensive history of the district and its woes in his effort to convince the CSD board and LAFCO that divestment was the only way for the district to continue functioning.

According to his report, the district faced a potential complete collapse in 2014—a shutdown of operations, administration, and management—when the provider of its services, APTwater Services LLC's parent company, went bankrupt. It left the district without any means to maintain operations unless it covered the cost up front from its reserves.

At the time, an individual stepped in to help prevent the loss of services: APTwater Services General Manager Charles Grace.

According to the report, Grace stepped in and personally paid for the CSD's operator salaries to ensure residents did not lose access to water or wastewater treatment services.

When the time came to consider a long-term service provider replacement, the CSD and Grace agreed that his company, Grace Environmental Services (GES), would take on that role. Grace also served as the CSD's acting general manager to ensure GES could transition into its new role properly.

After two years of administering services, the CSD granted an eight-year contract extension to Grace and his company in 2016. Faverty's report said Grace was never formally appointed as the CSD's general manager since he also ran GES.

Grace's dual role garnered the attention of the SLO County District Attorney's Office and the Fair Political Practices Commission (FPPC). They announced a joint investigation into Grace and his company in 2021.

In June 2023, the district attorney formally announced that it had found that Grace and GES violated state conflict of interest laws by participating in creating the contract that made his company the district service provider and made him the district's acting general manager.

"Public officials such as city council members, county supervisors, appointed officials including general managers must exercise their authority in a way that upholds the public's trust," SLO County District Attorney Dan Dow said in a June 2023 statement. "For this reason, California law forbids even the perception of self-dealing in contracts between these officials and the government."

The DA's Office said this was not the first time Grace had been accused of violating conflict of interest laws. In 2021, Grace paid the FPPC $4,500 over conflict of interest complaints from a local resident. San Simeon's district board also granted Grace $125,000 in reimbursements for legal expenses over the costs related to the court dealings, the DA's Office added.

As a final part of the settlement, the DA's Office and Grace agreed that he and his company, GES, would no longer be allowed to work with the district.

At the time, the CSD board was already reeling from the sudden resignation of two of its long-serving board members, Gwen Kallas and Daniel De la Rosa in April. While the board replaced Kallas with Holly Le that summer, De la Rosa's spot remains vacant.

Grace Environmental Services did not reply to New Times' request for comment.

Picking up the pieces

There was "an abrupt and hostile transition of operations, administration, and general management" when Grace's and GES's contracts were terminated in September 2023, according to Faverty's report.

"Grace left the district with nothing. He and the previous operators walked out the door after the settlement without offering any support," Faverty told New Times. "Sure, there are systems in place, but to be frank, they are antique and should have been replaced years ago."

The interim general manager has worked since he was appointed in late June 2023 to fill in the gaps left by GES.

Faverty has lived in San Simeon for years, teaching leadership classes at UC Santa Barbara.

"It's not a new thing to me; I lived in the town while I taught at the school," Faverty said with a laugh. "When it came time to change the people involved, I realized I wanted to be the one to step up and try to sort things out."

His work was cut out for him, he said, first having to replace GES.

"The first thing we did was hire Fluid Resource Management from Arroyo Grande," Faverty said. "They do a lot of wastewater service in California so we knew they would be good to bring in and try to right the ship, but even then, they still need help."

Faverty lauds Fluid Resource Management in his report for providing six qualified operators to handle the wastewater treatment plant compared to the two operators GES had employed during its time.

However, even with a group providing stability at the wastewater plant, issues remain. Faverty said during the Grace years, the CSD had agreed to several costly commitments.

Some of those include repairing the district's crumbling roads, fixing a broken pipe bridge costing around $150,000 to $200,000, restoring a defunct stairwell hanging over the bluffs by the ocean, and acquiring new water tanks to fit modern standards for fire mitigation.

According to Faverty, the most pressing issue is sorting out the relocation of the district's wastewater treatment plant.

"The California Coastal Commission wants us to move the wastewater plant," he told New Times. "That alone will cost us around $12 million to $15 million."

The district settled with the Coastal Commission in 2019 after being cited for violations related to its wastewater treatment facility's proximity to the ocean and flood risk. The CSD agreed to move the plant by 2038, which included submitting a relocation plan to the commission this year.

Faverty wrote to the Coastal Commission on Jan. 2 requesting a one-year extension due to the CSD's current financial and time constraint concerns.

On Jan. 3, Coastal Commission Central Coast District Director Dan Carl replied saying that if the CSD ended up divesting its water and wastewater responsibilities, the current agreement would have to be amended anyway.

The CSD continues to run a bare-bones operation, Faverty said, with only a few people outside of Fluid Resource Management helping him figure out how the district is going to pay for its capital commitments.

"The real challenge with the wastewater treatment project—alongside all of the other commitments we have—is the fact that right now we only have an office manager, myself, and a bookkeeper," he said. "That, coupled with the fact that we only have around $1.4 million in reserves to spend on extraneous projects like this, means we have our hands tied."

The interim general manager said he is wary of even dipping into those reserves, as most of those funds should be set aside in case of an emergency like a flood or fire.

A plea, a plan, and a process

Faverty factored this entire history in when he made his plea to the CSD's board on Feb. 1.

"We do not have the time to delay this choice any further," he told New Times. "That's why I have pushed the board to make a decision and pass this urgency ordinance so we can get the ball rolling."

However, according to LAFCO Executive Officer Rob Fitzroy, what Faverty is requesting is not how the divestment process works. Fitzroy said there is no way for SLO County or LAFCO to grant San Simeon any special treatment or expedite the process.

"The reality that most people don't realize—and honestly I don't blame them, as this is a rare occurrence in general—but the process of divestiture is complicated," he told New Times. "And most importantly, the process cannot be moved forward quickly."

According to LAFCO policy, divestiture can only occur once the party that wishes to move on from its responsibilities first applies to LAFCO.

"What problem are you trying to solve? What are the respective parties taking over? Why should those parties take over those responsibilities?" he asked, describing what LAFCO typically expects in the application. "Things like that, so LAFCO can then go and look it over and figure out early on what exactly is going on."

From there, the party taking over those operations—SLO County in this case—would then have to conduct a feasibility study. Once that study's complete and the county determines whether it has sufficient means to take over water and wastewater operations, county staff would take the feasibility report to the Board of Supervisors, which would vote to approve taking over those responsibilities.

"The process was made very clear [to the CSD] when I first was brought in to discuss divestiture as a potential option," Fitzroy said.

After the county reviews and approves it, the application goes to the LAFCO board. Then LAFCO will review the county's and San Simeon's reports before opening up the topic to public comment.

That public comment period lasts around a month, according to Fitzroy. If anywhere between 25 and 50 percent of the population of San Simeon were to submit written objections against it, the proposed divestiture would then go to a special election. If the number of objections is more than 50 percent of the population, LAFCO would terminate the entire action.

"One important thing LAFCO wants to stress in any scenario where a district is considering something like this is that there is ample time for the public to give input on the whole ordeal," Fitzroy said.

Only after all of this would the LAFCO board vote on whether to grant the divestiture request. But nothing can happen until the CSD acts.

"They need to pass a resolution saying, 'Yes, we need to apply to LAFCO,' and until they do, the rubber is not going to meet the road," he said. "It can take anywhere from nine to 12 months or more, depending on when they submit the application."

'They need to act'

Fitzroy acknowledged that San Simeon's situation is complicated, especially given the district's current obligations to move the wastewater treatment plant. However, from LAFCO's perspective, he said, it appears that the district doesn't need to divest from anything.

"What we are talking about in any context regarding divestiture is the district's ability to provide day-to-day operations for the things they are responsible for," he told New Times. "Are people getting clean water? From what we have been presented with, it appears that they are, which means they are able to function."

The CSD could also choose to dissolve—effectively ceasing to exist altogether while an entity such as SLO County takes over its functions. However, Fitzroy said that the process would involve a different application method that would also take a long time. Faverty said that dissolution is one of the options being considered alongside all the others.

Fitzroy understands that from Faverty's and the district's perspective, divesting wastewater and water treatment responsibilities and transferring them to the county might help when it comes to moving the treatment plant. But that assumes the county would have better pathways to finding grants or funding sources to spend on the endeavor.

"There are a lot of assumptions being made on everyone's end right now, and because a formal application has not been filed, we have not been able to do a proper study to verify this," Fitzroy said. "Even then, I need to stress that based on what we know right now, the district has confirmed it can maintain day-to-day operations autonomously without help."

If San Simeon's CSD does apply for divestiture, it wouldn't be the only active case in the county. In January 2023, the Oceano Community Services District applied to divest itself from its firefighting responsibilities and hand them over to the county while retaining its water and wastewater responsibilities. Fitzroy said the process is still ongoing while the proper information is being acquired.

SLO County 2nd District Supervisor Bruce Gibson—whose district includes San Simeon—said that while he is sympathetic to the CSD's situation, he doesn't want to get involved until that LAFCO application is sent in.

"I want to respect that local control they have had established for years," Gibson told New Times. "If this entire [CSD] wasn't set up by residents, I wouldn't feel as opposed to taking that control away from them."

Over the years, Gibson said, he has witnessed the alarming state of the district and attempted to maintain contact with board members and administrators like Faverty.

In recent conversations, Gibson said, he's told Faverty that even if the current leadership of the district wasn't the one that made these commitments, the San Simeon CSD still needs to be held responsible for the things it agreed to do.

"I'd be happy to advise the board and general manager as I have in the past until they can for sure decide what they want to do," he said. "But they have a fundamental responsibility to their residents and community—they need to act, not us."

'It's personal'

Faverty isn't giving up hope just yet.

"We still need to fix our roads, which are crumbling beneath our feet. Thankfully, we have been able to get that process started during all of this," he said. "Despite how dire some of this is, that—alongside potentially bringing on more staff to assist my current group—has me hopeful for the future if LAFCO can grant us this."

He said he understands why LAFCO and the county, despite wanting to help, have been hesitant to offer the district any special treatment.

"It has far less to do with them than it does with the uniqueness of our situation," he told New Times. "I have nothing but the utmost respect for both LAFCO and the county for doing what they can to work with us."

But he worries that the delay and length of the normal process will inevitably end up hurting the people who matter most—the residents.

"It's personal the way we are doing this right now," Faverty said. "Every board member, myself included, all of our staff, we are all residents and this will affect us one way or another."

Faverty said he's fearful that if LAFCO denies them, residents like himself may find themselves with a nonfunctional government and lack of services—something most of them should not bear the responsibility for.

"I know everyone here; they all have so much to offer—this town has much to offer, but it's been mismanaged for too long," he said. "My biggest concern is that nobody understands any of this ... they don't live here, and they assume, 'Oh, they can figure it out without any help!' But we can't.

"We are so small we don't stand a chance." Δ

Reach Staff Writer Adrian Vincent Rosas at [email protected].

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