Is it time for a forensic audit of the South County sanitation district?

March 31, 2014
John Wallace

John Wallace


Amid allegations of mismanagement, the South San Luis Obispo County Sanitation District’s former administrator stepped down, and less than a year later the plant is operating cleaner at less than 50 percent the cost, according to financial reports obtained from the district.

Under former administrator John Wallace, the district regularly exceeded its more than $6 million per year budget and ran at a deficit. Currently, the district is running at less than 50 percent of its budget, with overages being placed in a reserve account.

In addition, levels of fecal contamination remaining after treatment are dramatically lower than was the case under Wallace’s leadership, according to district officials.

For decades, Wallace acted as chief administrator of the district, and also as owner and president of the Wallace Group, a private engineering consulting firm located in San Luis Obispo. For years, the Wallace Group received between $50,000 and $80,000 a month from the district for a variety of engineering services. Even so, Wallace Group employees did not include a sanitation engineer, a district official confirmed.

In a 2010 exclusive, CalCoastNews detailed allegations that Wallace had been funneling thousands of dollars to his private engineering company, while concealing environmental violations. For example, Wallace would secure board approval to repair a piece of equipment, charge the district for the engineering through a payment made to the Wallace Group, and then not implement the repair. Several years later, the sequence would repeat, with Wallace Group again getting paid to do the engineering and the repairs never being done,  according to district staff.

Amid reports to state regulators from employees detailing mismanagement and alleged illegal acts, the district board terminated two employees who viewed themselves as whistle-blowers.

In Sept. 2010, the district board voted 3-0 to eliminate Devina Douglas’ lab technician position, after her complaints to the water board resulted in the plant receiving a notice of violation that included allegations that the plant discharged dirty water into the Pacific Ocean. Douglas says she refused to throw away a sample showing high levels of bacteria after being instructed to do so by plant management.

In Feb. 2011, the district terminated shift supervisor Scott Mascolo after he told state and local regulators that the district had violated laws. Prior to his termination, Mascolo reported incidents of suspected misuse of public funds and problems with the plant complying with safety and health requirements to several government agencies.

In June 2011, the San Luis Obispo County Grand Jury said that the district board failed to recognize the conflict of interest between Wallace’s administration of the district and his private engineering firm, and that Wallace’s contract had never been competitively bid as required by law. The three-person district board fired back a response saying that the Grand Jury’s allegations of district mismanagement “were largely inaccurate.”

The sanitation district, which serves the residents of the Oceano Community Service District, Arroyo Grande and Grover Beach, is governed by a three person board consisting of one representative from each community. In June 2011, the board included Arroyo Grande Mayor Tony Ferrara, Grover Beach Councilman Bil Nicolls and Oceano Community Services District Board Member Lori Angello.

Shortly after the board’s battle with the Grand Jury, Oceano Community Services District Board President Matt Guerrero replaced Angello and began to question expenditures, though little change occurred.

Then in Jan. 2013, Grover Beach Mayor Debbie Peterson replaced Nicolls on the board. Peterson poured over reports, examined accounting records and demanded action.

In Feb. 2013, at a closed session meeting set to discuss Wallace’s performance, Wallace announced plans to resign. Though he stepped down a few months later, he continued to have some influence over the district for several more months, distract staff said.

The last four months of Wallace’s full administration – Nov. 1, 2012 through Feb. 28, 2013 – the district had $1,313,167 in expenditures, according to district board packages. During the past four reported months – Oct. 1, 2013 through Jan. 31, 2014, – the district had expenditures of $782,385, a reduction in cost of $530,782, according to district board packages.

Nevertheless, the district owes the state a $1.1 million fine for a 2010 sewage spill determined to be the result of Wallace’s mismanagement. In addition, under Wallace, the reserve account — which previously held more than $10 million — was completely drawn down.

Following Wallace’s resignation, Peterson requested a forensic audit of past practices in an attempt to possibly reimburse ratepayers for misappropriated funds. However, Ferrara and Guerrero voted against Peterson’s proposal, and it failed 2-1.


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It’s past time. Simultaneously, the community should sue to recover/retract the $1.1 million in fines, shifting the entire liability to Wallace NOT the tax payers..


I find it funny that Mr. Wallace took a keen interest in the Blue Ribbon Committee meetings whereby they are attempting to set up a Water District above the Paso Robles GWB – his Pavlovian response flooded the front of his shirt with drool. The prospect of such a cash cow I’m sure was hard to contain.


While I’m shocked Wallace is still in business, I’m even more shocked that the taxpayers in the area haven’t flocked to the polls to vote these scoundrels out. …And a 50% cost reduction..! If that doesn’t scream corruption, I don’t know what does. I second the comment that Wallace should be facing criminal prosecution for his part in all this.

So sad there is so much complacency here on the Central Coast. …And sadder still that they only people who will read these comments are those who have already seen the light. Great work, CCN. Thanks for breaking this story three years ago, and thanks for keeping us updated.


Although public enemy #1 of the District has stepped down before terminated, still one player remains. His name is Mike Seitz, District Council. Mr. Seitz has also bleed the District dry standing along side Mr. Wallace from day one, twenty five years ago. Although numerous times different council specializing in labor or regulatory issues was hired, Seitz attended and stood with Wallace thru employee hearings and proceedings and offered council. Seitz is being paid to protect us,the public, the tax payers, NOT his personal friend who is and independent contractor with his own companies best interests. He does not now, nor has he ever, had our tax dollars in his best interest.

Please, I urge the board of directors to look into the facts and bills over recent years. Its time to obtain new council for the District.


I have followed this story for many years and I’m surprised that Wallace hasn’t landed in jail. From what I’ve read in CCN, the story of Wallace and the District is one of collusion and deceit at high levels within the County. To the extent the statute of limitations allow, I would urge the Country to investigate and prosecute all those suspected of committing a large-scale, long-term conspiracy to defraud the taxpayers.


Yes, and while they’re at it, investigators need to look at Wallace’s activities in Morro Bay, and the people in City government who hired him. One thing that would be good for them to look at is a FEMA flood map revision done just a few years ago.


I will bet that any records that have not been produced so far will some how get lost! Why any agency or CSD, like Templeton, San Miguel continue to work with this firm is just astounding. And lately Wallace Group has another questionable character trying to make headway into the Monterey County market. When will people wake up and simply fire them and bring in reputable people to help them out?


Without a forensic audit this is only the tip of the iceberg. And that’s why the board at the time rejected the idea of looking into their own major mishandling of public funds.

And what other districts does the Wallace Group have its tentacles in? We are talking millions upon millions of dollars spent without question or scrutiny.

Debbie Peterson called for audit that never happened because of CalCoast News reporting of the many whistle blowers who had the courage to come forward and paid the price in ridicule and job loss. Even the Grand Jury was sent packing with their tail between their legs.

These local area water and sanitation districts are ‘cash cows’ for a select few with combined budgets approaching and or exceeding budgets of entire cities governed by individuals with very little interest in efficiently spending public funds!

Kevin Rice

Mayor Peterson deserves all the credit for the district’s turn around, despite that she never got support to audit the problem.

Los Angeles Times: “She has moxie and business experience. Voters in 2012 chose her by a wide margin… Retreat is not an option.”


I would like to see her use the same scrutiny she used on SSLOCSD on the Five Cities Fire Authority. An entity that was supposed to save money, isn’t.

They had the opportunity to let the Chief retire; instead he’s been hired on as a part-time temporary employee Administrative Battalion Chief. Up to 39 hours a week, at $46.44 per hour (no benefits). He has a healthy pension.


Just delivered my “NO” ballot for the FCFA new tax, hope it fails by a large margin. It should most everyone I have talked with said they were voting “NO” also.



Please tell your friends to appear at Friday’s 2:00pm FCFA meeting at the GB Council Chambers. The FCFA Board can be told to hold the assessment in abeyance until a quote from Cal Fire is sought.

They did not due their due diligence by the ratepayer and get that quote prior to spending thousands of dollars on an assessment engineer who will be paid a $14,500 bonus if the assessment passes.

Why hire the Chief to “Administer” for another year when retiring the position could have lead to as much as a $95K cost saving measure?

I’m so disappointed for the three communities. It doesn’t appear the leaders want to shake up the statusquo. Debbie was great at the Sanitation District, but she’s on board with FCFA.

A resounding NO on the assessment will send a pretty clear message. I hope the community is paying attention.


By the way, those who have voted YES can change their vote to NO all the way up to that meeting April 4 at 2:00pm.


I Voted No on the Tax Increase and Pension Bailout.

The current chief who recommended this tax and voting process is receiving $ 129, 374. 54 in CalPers Retirement. Projected to earn another $95,000 in 2014 from the FCFA for doing the same job.Total compensation $ 224,374!

I submit to the voters, elected officals, and fcfa, that we do not have a budget problem, we have a spending problem. The last thing we need to do is hire more full time employess and take on more long term financial obligations that we certainly cannot afford.We need to balance the budget with existing revenues. Certainly the merger has not saved money and the department is out of control.

From not allowing a opposition statement to be included on the ballot, to using taxpayers money to send a brochure that clearly supported their own tax increase, to giving a gift of public funds to the outside the area consultants if they win the election, to voting to support their own tax increase agenda with the taxpayers public parcels,has left the communites disappointed in our elected officals and the department.

Trust for elected officals and public servants is so hard to earn and so easy to lose with this type of election process and tax.

“Political Interests can never be seperated in the long run from Moral Right.”

Thomas Jefferson, in a letter to James Monroe, 1806.


Debbie Peterson may have called for the audit but the credit goes to CalCoast News.

CCN started reporting on this still unresolved scandal 2 years before ANYBODY to include The Tribune, KSBY and especially New Times who often ride the coat tails of CCN and try to take the credit!


Unfortunately she got it wrong with the Fire Tax.

It will be interesting to see if she has the “moxie” to correct this tax for a department that is clearly out of control.


This is what happens when you “privatize” public functions — you pay more, and get less. Sounds like good proof that public agencies CAN do a better, more economical job than private contractors, who add on profit and overhead public agencies don’t have to pay themselves. Elementary, my dear Watson.

Kevin Rice

Ha! This was not “privatized”! The public agency with its board hired Wallace and oversaw the entire ordeal. It was the public agency and its board that refused to allow the audit Mayor Peterson called for.

Lori Angello made moves to remove Wallace and was thwarted by Ferrara and Nicolls. Then Mayor Peterson came in and dug into matters. It was under her scrutiny that Wallace left.


This is precisely privatization at its worse. A private company raiding the public coffers with the indifference (or help?) of a inept (or corrupt?) board!

Both private companies and government agencies need real oversight!


I think that in some cases, hijinks, you are absolutely right, but I believe that there are also cases where a private agency can do the work better and more economically than a public one,

In the situations I’ve observed, it all goes back to the honesty and competence of those doing the work. So, it seems to me that the bottom line is that it’s safer not to trust any agency, public or private, with the public’s money. As CCN has demonstrated on so many occasions, we need to monitor and question and challenge on a regular basis.

Kevin Rice

I agree. Both forms of providing services are prone to corruption when the public is not involved in oversight. I believe Ferrara and Nicolls both failed miserably in responsible leadership.


Ferrara and Wallace go way back to being employees of Los Angeles. Ferrara a peace officer and Wallace and engineer in flood control. Good buddies from way back who have managed to protect each others interests. Wallace and City manager Perrault of Grover and also compadres. Just think of all the projects Wallace has done for AG. Much like the former San Dist look at their finances and particularly Grover’s condition. Wallace was also the engineer involved in the Highway 1 drainage from way back. Works well dosent it? As God is my witness Nicolls was sent a letter created by District employees describing the concerns at the District long before it came to a head. Nicolls did nothing. Matter fact he turned the letter over to Seitz and Wallace so they could begin the head hunting process which resulted in Douglas and Mascolo being terminated. Rodriguez (Wallaces side kick) was shortly there after placed into Mascolo’s position to carry on allowing Wallace legacy to continue. Fortunately It didn’t take long for the new plant superintendent to see what was taking place. Rodriguez was given the option to step down to operator from Shift Super, or be terminated. This was the result of pencil whipping official APCD compliance documents & being incompetent in his position.


That’s really interesting – and not surprising. As we all know, cronyism is rampant in this county, and it is costing taxpayers a bundle.