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A controversy-riddled water district involved in a federal corruption investigation is in danger of losing its insurance, a political black eye that could have implications for the agency and its 2 million customers.
The Assn. of California Water Agencies Joint Powers Insurance Authority has recommended to its board that it drop the employment liability insurance for Central Basin Municipal Water District, citing the circus-like atmosphere at the agency.
The authority insures hundreds of water districts across the state, and this would be only the second time in its 35-year history that it canceled coverage for a water district.
"It appears to an outsider that there is a sense of dysfunction on the district's board," the insurance authority wrote in a letter to Central Basin. "This dysfunction is resulting in an inordinate increase in litigation against the district."
The insurer noted that Central Basin had an usually high number of legal claims against it, and said that, more important, the ongoing threat of more litigation posed too great a risk for other members of the insurance pool.
Central Basin, or its members, has been the subject of several investigations in recent years. Its own lawyers say it violated state law by secretly creating a $2.7-million fund for a groundwater storage project. The district has been accused of doing favors for the family members of politicians. And its elected leaders have faced their own troubles, including one suspected of impersonating his brother, a fellow politician, to get out of a DUI conviction, and one accused of sexually harassing a district employee.
Losing its insurance could hurt Central Basin's standing in financial markets and its ability to get loans, and would mean the district would have to find another insurance provider, possibly at a much higher rate.
Gary Milliman, a municipal insurance expert who once served as South Gate city manager, said Central Basin would be hard-pressed to find replacement insurance without paying considerably more. Losing its insurance could make it harder to secure loans and grants, and even to proceed with projects.
"The general fund of your agency would be at risk for losses that would normally be insured." Milliman said. "Reputation really does matter when you're going into the financial markets."
Central Basin serves a largely working-class area of southeast Los Angeles County. The district has been criticized in the past for raising water rates.
The agency's finance director, Richard Aragon, said he was confident the insurance situation would not lead to rate hikes.
In 2010, the troubled city of Maywood laid off virtually all of its employees soon after another provider dropped its insurance as a result of a history of lawsuits. The city ended up contracting its operations to neighboring Bell, which was soon engulfed in a corruption scandal that culminated last week with its former city administrator, Robert Rizzo, being sentenced to 12 years in prison.
The water district was also enmeshed in a federal investigation of a state senator and his brother, Tom Calderon, a former assemblyman and Central Basin consultant.
One longtime board member, Robert Apodaca, is the subject of a $1-million sexual harassment lawsuit against Central Basin filed on behalf of a former employee, who alleged that he had a well-known pattern of "improper sexual actions and conduct with subordinates." Apodaca declined to comment through a water district spokesman.
Last year The Times reported that another one of the directors, Art Chacon, may have impersonated his brother — a Montebello school board member — after being arrested on DUI charges in 2011 in Whittier.
Another board member, James Roybal, is spending his workdays at a Los Angeles Unified School District facility for teachers who are under internal investigation for accusations of poor performance or improprieties. LAUSD spokesman Thomas Waldman confirmed Roybal was there but would not elaborate on why. Roybal has declined to comment.
Central Basin has made some efforts at reform. Earlier this year it reached a peace agreement with a rival water agency in a conflict that had cost the organizations nearly $5 million in legal fees combined.
Last year it also ended the contract of a longtime consultant and former assemblyman, Tom Calderon. He and his brother, state Sen. Ronald S. Calderon (D-Montebello), were indicted earlier this year in a massive federal fraud case. The FBI subpoenaed large amounts of documents from Central Basin in the case.
Paul Dyson, a director at Standard & Poor's, said Central Basin's new management made some recent moves — including cost-cutting — that will give the agency a projected $16 million in reserves by the end of the fiscal year in June. The bond-rating agency will monitor the water district, but Dyson said he believed the reserves would help it weather the potential loss of its insurance for a while.
Still, the district remains a political battleground, with board members attacking each other in the local media, from the dais and at news conferences.
The water agency insurance authority has complained that the agency is in the news a lot but usually doesn't come out in a "favorable light."
The insurer has proposed several steps the district can take to preserve its coverage, such as bearing the financial cost of some of the claims against it, including the Apodaca case, and forgoing some insurance coverage for six months. The Central Basin board has discussed the insurer's proposal and is weighing other options, including finding another insurance provider.
Phil Hawkins, a former state assemblyman who is the president of Central Basin's board of directors, said the elected leaders needed to try to put aside their differences for the good of the public agency.
"We need to get the emotion out of this and get back to the business of water issues only," he said.
Tony Perez, Central Basin's general manager, said the district hoped to find a compromise, which could include the water district taking financial responsibility for some of the claims instead of passing them off to the insurance authority.
As for ending the political infighting, that's a work in progress.
"There's the business of the district, then there's the relationship the directors have with each other," Perez said. "The relationship between the directors? Staff is working really hard to compartmentalize that and go ahead and do the good work of the district, which I think for the most part we're succeeding at."
hector.becerra@latimes.com
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