O.C. Water District: From Obscurity to Notoriety : Utilities: Conflict-of-interest allegations put formerly little-known Santa Margarita agency in the spotlight.

MISSION VIEJO — In 1961, from his office at Citizens National Bank in downtown Los Angeles, Warren W. Wilson plotted the future of south Orange County.

Southern California’s postwar housing boom had swept through northern and central Orange County and by then was approaching the 53,000-acre Rancho Mission Viejo at the county’s southern end. But before the ranch owners, the O’Neill family, could entertain development plans, they had to bring water to the rugged canyons and plateaus located miles from existing pipelines.

As trust officer for the O’Neills, Wilson in 1964 organized the engineering and financing tool to do the job: the Santa Margarita Water District, an agency that recently became the target of an Orange County district attorney’s office investigation for possible conflict-of-interest law violations.

The Times reported last week that Walter W. (Bill) Knitz, general manager for the district, and his deputy, Michael P. Lord, have accepted more than $40,000 worth of gifts from contractors, bankers, developers and consultants, some of whom they recommended for contracts. The Times also revealed that the two men have been reimbursed for tens of thousands of dollars of questionable expenses over the past decade.

Until the recent revelations, the powerful agency had functioned in relative obscurity for 30 years. It has served as a master planner and overseen the building of the reservoirs, pipelines and treatment plants that provide water to the communities that sprang from the ranch--Mission Viejo, Coto de Caza and Rancho Santa Margarita.

“Until we had water, the developers weren’t interested,” said Wilson, who worked with the O’Neill family for 23 years. “No one would have even talked to us. Without water, maybe we could have got $75 an acre for the property. Without water, all we could do was maybe lease the property to artists to come in and paint oil paintings.”

Before the 1960s, the O’Neill family had resisted development of its land, which was acquired in 1882 by Richard O’Neill Sr. and James E. Flood, two San Franciscans who had profited mightily from the Gold Rush.

In 1941, the family was forced to sell a large parcel of property to the federal government for what was to become Camp Pendleton, and older members of the clan resisted any further distribution of the land. Richard O’Neill’s daughter-in-law, Marguerite (Daisy) O’Neill, who lived to be 102, was outspoken on the issue.

“Every time (she) would get wind that the trust was interested in selling the ranch, she would raise all kinds of hell,” said Tony Forster of San Juan Capistrano, whose great-great grandfather sold the ranch to the O’Neills. “She came from a family that owned Rancho Palos Verdes and she saw what happened when you sell a ranch. You lose it.”

But the extension of Interstate 5 through South County in 1959 signaled the end of the old ranchos. Rancho Mission Viejo found itself surrounded by developers.

To the north, work was underway to transform the Whiting Ranch into El Toro--now Lake Forest. To the west the Moulton Ranch was in the process of becoming Laguna Niguel, and, to the south, there were plans afoot to expand sleepy San Clemente.

“Because of the development, the assessed value of the ranchland was rising rapidly,” Wilson said. “It was either develop parts of it or be taxed out of it.”

By 1963, the decision was made to sell a 10,000-acre parcel that would become Mission Viejo. The buyer was a young millionaire from Beverly Hills named Donald Bren, who later would buy the Irvine Co., becoming the county’s largest private landowner.

By the mid-1980s, the O’Neill family’s Santa Margarita Co. began development of 5,000 acres on a flat plateau in the northeast corner of the ranch. Called Rancho Santa Margarita, it is now home to 18,000 people and plans call for it to grow to 40,000 residents.

Much of the groundwork for these developments had been laid by the Santa Margarita Water District. The bigger projects included construction of two water pipelines linking the district to the Metropolitan Water District of Southern California, which brings water to the Southland from Northern California and the Colorado River.

One pipeline was the 25-mile Allen-McColloch Pipeline, which runs south from the Diemer Filtration Plant in Yorba Linda. Ten other water districts contributed to the project. An extension of that line is the 27-mile South County Pipeline, which runs through the ranch and links the Santa Margarita Water District with the San Clemente and Dana Point areas.

Since the mid-1970s, Knitz and Lord have overseen the operation that serves 26,500 customers in Coto de Caza, Rancho Santa Margarita and parts of Mission Viejo.

On Monday, the district attorney’s office launched an investigation into whether Knitz and Lord violated state conflict-of-interest laws by recommending that contracts be awarded to companies that had given them thousands of dollars worth of gifts. Both managers say their acceptance of gifts has no bearing on the contracts awarded.

Also on Monday, the district’s board of directors suspended the men’s spending privileges. The action was triggered by reports that Knitz and Lord had been reimbursed for such questionable expenses as a $245 limousine ride, $200 theater tickets, rooms at expensive hotels like the Ritz-Carlton and cross-country trips for their wives.

In an interview, Knitz and Lord defended the expenses they had claimed, saying their spending habits must be measured against their success in achieving the district’s goals.

The disclosures about Knitz and Lord have caused some people to suggest reorganizing the district.

As was typical in agricultural areas of the state, the Santa Margarita Water District lawyers set up the district so the landowners could control the election of its board of directors. In such “landowner districts,” votes are awarded exclusively to landowners on the basis of one vote for each dollar of assessed land value. Nearly all districts today, however, follow the rule of “one man, one vote.”

Thomas C. Blum, executive vice president of the Santa Margarita Co., said landowner control made sense in the early years when the land was the main collateral for $2.25 billion in bonds authorized to pay for the water and sewer facilities.

“Maybe it is time to change,” said Blum, who served for eight years on the water district board. “But it was completely logical the way it was set up. If you want water and sewers on your land, you have to control how you are going to pay for it and how much.”

The debate over election rules is reminiscent of a fierce fight that took place in another former ranch community--Irvine.

Like the Santa Margarita Water District, the Irvine Ranch Water District was organized in 1961 as a landowner district.

“We knew eventually it had to change to one-man, one-vote, but there was no question that we should have set it up the way we did,” said Lansing Eberling, 59, who was a director of the Irvine Ranch Water District from 1968 to 1978.

As the city grew, the district drafted legislation that would allow it to begin phasing in publicly elected directors. But the process was not fast enough for some city leaders. They filed a lawsuit in 1979 demanding an immediate switch to one-man, one-vote.

The court avoided ruling on the one-man, one-vote issue, and instead decided that the phasing plan was unconstitutional. The water district agreed to change to a publicly elected board and two other landowner districts--the Moulton Niguel Water District in Laguna Niguel and the El Toro Water District--immediately followed suit.

Of Orange County’s 18 independent water districts, only Santa Margarita Water District and Los Alisos Water District in Lake Forest remain in the control of landowners.