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Too close for comfort? 

A $1.1 million sewage-spill penalty renews questions over John Wallace's dual roles

Local engineer John Wallace is, by all accounts, a charming, likable fellow, described by some as Jimmy Stewart-like. But he’s also been the focus of two grand jury investigations and an increasingly loud community outcry for wearing one too many hats when it comes to sewage.

TWO HATS :  John Wallace is the district administrator for a local sewer district, while his company carries out many of the district’s engineering services. To some observers, the situation is ripe for a conflict of interest. - PHOTOS BY STEVE E. MILLER
  • TWO HATS : John Wallace is the district administrator for a local sewer district, while his company carries out many of the district’s engineering services. To some observers, the situation is ripe for a conflict of interest.

Wallace is the district administrator for the South SLO County Sanitation District, which collects and treats the sewage from homes and businesses in Arroyo Grande, Grover Beach, and Oceano. His engineering company, Wallace Group, provides most of the engineering services. It’s a cozy relationship that’s endured for more than 25 spill-free years.

But after water-quality officials issued a $1.1 million penalty against the district earlier this month for a 2010 raw sewage spill—citing “negligent behavior” and lack of proper maintenance at the wastewater plant in Oceano—more people are asking if Wallace’s dual-role model is really the best way to run the sewage district.

“At some point you’d hope the board of directors would look at this and make improvements, but the same management is still in place, and there are ongoing effluent violations,” Julie Macedo, the chief attorney for the prosecution team of the State Water Resources Control Board, said in an interview after the penalty ruling.

Wallace’s double duty is beneficial to the district, he believes.

“My dual role has provided the opportunity for the district to have less expense than a permanent staff, and to call in experts as needed,” he said in an interview with New Times.

Larger jobs and specialty jobs such as electrical engineering are contracted out, he said.

“We [Wallace Group] provide more day-to-day services, like a city public works department,” he explained. “Some smaller districts do this as a cost savings measure.”

The state’s Office of Enforcement is investigating the sanitation district, Macedo said.

“I don’t want to speak about the avenues of my investigation,” she noted. “We will definitely investigate the effluent violations, and if we pursue any enforcement, if we pursue criminal or civil action through the district attorney or the state attorney general, then it will become public knowledge.”

The sanitation district’s recent effluent violations—including a count of 50,000 fecal coliform (the limit is 2,000)—will be presented to the water board at its December meeting, according to Katie di Simone of the water board staff.

Citing last year’s SLO County grand jury report that identified a conflict of interest in Wallace’s dual roles, Macedo said, “People can read that report and decide for themselves. Do you want the same person making all the decisions to be the same person issuing checks? Will that person always be fair? Will that person make decisions that are not in their self-interest? Will that person not give favors to friends? That takes a very special person.”

Macedo told New Times she’s been contacted by the South County’s “very active citizenry” about the dual-role conflict issue.

“I don’t know if it’s an old boys’ club, but they feel Mr. Wallace has gotten away with this for too long,” she said.

“When you have a $1.1 million fine issued by a regional [water] board after 17 hours of deliberation, who thought the sewage spill could and should have been prevented, and the board of directors [of the sanitation district] says nothing’s wrong, if as ratepayers you’re fine with your rates going up and Mr. Wallace making the kind of profits he is, you have to ask yourself if you think this is fair,” she added.

Wallace doesn’t sign the district’s checks anymore, following an investigation by the SLO County auditor-controller, but he still prepares budget reports for approval by the three-person board of directors. That approval process mitigates any potential for conflict of interest, according to the district’s response to the grand jury report.

Wallace’s contract with the district, originally signed in 1986, was separated into two contracts—one for him and one for the Wallace Group—after the grand jury investigation last year.

click to enlarge SPILLING OVER :  An overflow of hundreds of thousands of gallons of raw sewage from the wastewater treatment plant in Oceano, and a resulting $1.1 million penalty, are raising questions about the plant’s management. - PHOTOS BY STEVE E. MILLER
  • SPILLING OVER : An overflow of hundreds of thousands of gallons of raw sewage from the wastewater treatment plant in Oceano, and a resulting $1.1 million penalty, are raising questions about the plant’s management.

“These contractual relationships provide the best means of achieving and maintaining efficient and economical operations within the district,” according to the district response.

“John Wallace’s job is to carry out the budget. He does not decide what’s in or out of the budget,” the sanitation district’s legal counsel, Michael Seitz, told New Times.

Sanitation district officials also cited a three-page 1993 grand jury report that found Wallace had no conflict of interest from a similar dual-role position at the San Simeon Community Services District.

Wallace Group charged the sanitation district $836,000 for its services in the 2009-2010 fiscal year, the most recent grand jury discovered.

A similar amount—$829,563—went to Wallace Group the next fiscal year, according to a review by the SLO County auditor-controller.

Those payments were approved by the board of directors—Arroyo Grande Mayor Tony Ferrara, Grover Beach vice-mayor Bill Nicolls, and, since January, Oceano Community Services District President Matt Guerrero.

Guerrero refused to approve the annual budget earlier this year, after asking some pointed questions about where the money was going.

“I wasn’t sure the budget accurately reflected the expenses of the district,” he told New Times.

He was outvoted, 2 to 1. It’s a voting pattern that is not uncommon at district board meetings, with Oceano’s representative on the losing side.

The balance of power is likely to shift with the coming election. Grover Beach’s representative, Nicolls, was appointed by Mayor John Shoals, who’s not running for re-election because of term limits. Both candidates for mayor—city council members Phyllis Molnar and Debbie Peterson—say they wouldn’t re-appoint Nicolls and would personally serve on the sanitation district board of directors.

“This is an antiquated system we have. It falls back on the impression of it being an old-boys’ network,” Molnar said in an interview.

“Technically now John Wallace has two separate contracts, but I don’t care what anybody says, that is so conflict of interest. It never goes out to bid. How are you going to supervise yourself?” she said.

Molnar, a professional bookkeeper, said she wouldn’t vote to approve the budget without understanding exactly how much money is coming in and going out.

“I also have an extreme problem with the so-called confidentiality of everything at the district,” she said.

Molnar would give Wallace a choice about which hat to wear for the sanitation district—the district administrator or the engineering consultant, but not both.

Peterson, also a candidate for Grover Beach mayor, said there are “very strong feelings” in the community about Wallace’s dual role.

As someone who runs her own business, Peterson said she’s looking forward to having “easy access” to the district’s records and accounts, and gaining a “clearer understanding of what goes on there.”

As for the $1.1 million fine for the district’s 2010 raw sewage spill, Peterson doesn’t believe it should be the responsibility of the ratepayers to pay: “The ratepayers aren’t responsible for the spill. They’re the victims. The only way [ratepayers should pay] is if the fine could be used to improve accounting and management at the district, which would be in the ratepayers’ best interest.”

Even before the water board issued the $1.1 million fine, the sanitation district was under scrutiny. A “focused internal control review” by County Auditor-Controller Gere Sibbach a year ago agreed with a grand jury recommendation that the sanitation district should evaluate “the advantages and disadvantages of hiring a full-time administrator and/or engineer” rather than contracting out for those services.

Sibbach called for the district’s quarterly financial reports to include a fourth-quarter year-end report, rather than rolling those figures into the next year’s budget approval. He recommended that the district use the county treasury for all financial transactions except perhaps payroll, rather than continuing to use an outside bank account.

The auditor-controller also recommended that contracts for Wallace and Wallace Group should include a not-to-exceed amount, with any overruns to be approved by the board of directors before they occur. That recommendation has been implemented by the district, according to Seitz, although the not-to-exceed amounts are presented in the annual budget, not the contracts.

Members of the Regional Water Quality Control Board, who voted unanimously on Oct. 3 to impose the $1.1 million fine, cited the harm the estimated 674,000 gallons of raw sewage caused to the environment and to human health, as well as pointing to “negligent behavior” that resulted in the spill.

The sanitation district’s board of directors voted 2 to 1 a few hours later to appeal the decision.

According to Seitz, the district’s legal counsel, attorneys will try to have additional evidence accepted for the appeal hearing. A new audit report of district finances shows a total of $3.7 million, of which $3.2 million from sewer connection fees is set aside for future plant improvements, Seitz said.

A state accountant called by the prosecution team had testified at the water board hearing that the latest financial records available to him—fiscal year 2009-2010—showed a total of $5 million in unencumbered funds in the district’s bank account, which could be used to pay the penalty without raising rates.

“Now the total amount is reduced by $1.3 million, due to projects and expenses the district incurred from that point to this point,” Seitz explained.

Sanitation district attorneys also plan to contest water-quality officials’ assertion that the hundreds of thousands of gallons of raw sewage that overflowed in December 2010 caused environmental harm.

“Whatever amount of wastewater spilled, it was mixed with millions of gallons of floodwater. The parts-per-million [of contaminants] would have passed 80 percent of the discharge requirements. But the state is saying dilution is not a solution to pollution,” Seitz said.

Nearby beaches were already closed due to high water from storm conditions, he said. Seitz also refuted the water board’s finding that raw sewage that flowed out of manholes and also backed up into bathtubs and toilets in some Oceano homes presented a public health threat.

“No one ever claimed to the [sanitation district] board that they got sick. Those houses didn’t comply with the uniform building code; they didn’t have backflow prevention devices,” he said.

An electrical short at the sewage treatment plant in Oceano—caused by floodwater flowing into an electrical conduit—tripped a main circuit breaker and shut down all four influent pumps in the underground pump station.

“The key factor that caused the sewer overflow was the lack of protection from the storm event, a factor within the control of the discharger [the sanitation district],” the water board’s penalty ruling stated.

A valve on the emergency pump had been left in a closed position, causing untreated sewage to back up.

“The discharger failed to ensure implementation of proper standard operating procedures” by failing to ensure that the valve remained open at all times, and “failed to provide a reliable emergency pump that could operate without repeatedly shutting down,” the water board found.

According to Seitz, the proper procedure is to verify that the valve is open before starting the emergency pump, but the plant superintendent, Jeff Appleton, failed to do that.

Appleton testified that the valve had always been chained open in the past, at his direction, but the procedure had changed when he was on a leave of absence. He waded into waist-high raw sewage during the storm to try to open the valve, but had to abandon the effort when the sewage rose higher and higher.

Seitz said the sewage backup wasn’t caused by any negligence or lack of maintenance on the district’s part.

“The water board wanted to make an example out of the district” by setting a high penalty amount, he said. “I don’t know anything about that board. [Their decision] takes me aback. We’re going to make sure this is viewed by independent eyes.”

Seitz is hopeful the district’s appeal of the penalty will eventually be heard by a local judge in the SLO County Superior Court. First, though, it will go to the State Water Resources Control Board for their consideration.

He believes the sanitation district has “a strong case.” The appeal will be based on the district’s inability to pay the fine, the lack of evidence to support the water board’s findings, and the lack of due process because the water board hearing should have been spread over two days instead of a 17-hour marathon, he said.

For state prosecutor Macedo, the district doesn’t have “any leg to stand on” and will face a lot more legal fees.

“The regional [water] board clearly established why they did what they did,” she said.

By increasing the penalty based on alleged harm to the environment and human health, and based on the district’s culpability for the spill, “those factors hopefully sent the district a message that this was preventable.”

Macedo added, “I wasn’t going after Mr. Wallace, I was going after the district. The [wastewater discharge] permit was issued to the district. Mr. Wallace is responsible for managing and controlling operations, but he’s not on the permit.”

She said if homeowners whose houses were flooded with raw sewage decided to sue Wallace or Wallace Group, and if he were found negligent, he would have to pay the penalty through his insurance or his company’s insurance.

“Or if the district were to sue Mr. Wallace, that’s a way he’d have to pay,” she added.

If ratepayers are concerned about Wallace’s dual roles and potential conflict of interest, Macedo said, “It’s a public outcry issue. Ratepayers can go to the board of directors and say, ‘We don’t want to pay a fine. We want Mr. Wallace replaced.”

Wallace said, “We’ve done a good job. We’ve done our best for the agencies.”

Contributing writer Kathy Johnston can be reached at [email protected].


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