East Palo Alto officials say city takeover stabilized sanitary district after fraud, operational gaps

Melvin Gaines, East Palo Alto city manager and the city's appointed general manager of the East Palo Alto Sanitary District (EPASD), told the San Mateo County Local Agency Formation Commission (LAFCO) on Jan. 21 that the city's takeover of the district has produced "stability and governance, service delivery, financial controls, regulatory compliance, and long term infrastructure planning."

Gaines said LAFCO unanimously approved the reorganization on Nov. 15, 2024 and the change became effective Oct. 1, 2024. He told commissioners the city found several operational gaps after assuming control, including missing financial controls and inconsistent permitting. "We actually found that there was a $500,000 payment that was, fraudulently cashed, and the district lost those funds," Gaines said. He said the city pursued an investigation with the district attorney's office and ultimately placed an insurance claim that repaid the district.

The city moved district financial operations into East Palo Alto's systems to reduce paper checks and strengthen internal controls, Gaines said. He described additional changes: adopting a sewer system master plan, establishing a capital improvement program, instituting a fats, oils and grease ordinance for restaurants, and contracting West Bay Sanitary District for day-to-day operations and maintenance.

Gaines gave concrete operational figures: since the October takeover contractors inspected more than 129,000 feet of sewer pipe and cleaned over 250,000 feet; the district reported three sanitary sewer overflows after the takeover but, he said, staff mitigated and reported each spill in compliance with state reporting requirements. He also reported the FY 23-24 audit (covering the period before city control) showed discrepancies tied to the fraud, while the FY 24-25 audit approved in January was "a clean audit with no findings."

Commissioners asked about rate impacts and development permitting. Gaines said EPASD rates were $660 per year at the time of takeover; a prior district study had recommended about $900 per year, and West Bay customers pay roughly $1,400 per year. Gaines said the city will conduct a new rate study and that increases for existing customers would go through the advisory committee and a formal review process. New development would pay connection fees to cover new infrastructure.

Gaines closed by describing the capital plan as a living document that will be updated as priorities change and thanked LAFCO for its oversight.

What happens next: commissioners retained the record on the informational item and asked staff to continue communication with the city about technical follow-ups such as will-serve processes and the upcoming rate study.