Tuesday, November 14, 2017

Update 2: Senate Republican Tax Plan would increase my taxes $2,100 next year & about $3,250 the following year

Last week, the Senate released its tax proposal.  It is a little better for my family than the House proposals and original framework that I blogged about in more detail previously (here and here).

The big beneficial difference for us in the Senate Plan is the change in the child tax credit which increases the phase out level to a million dollars in income so we would now qualify for child tax credits.  However, my youngest is 17 next year so we would only get $1,650 credit next year, before dropping to a $500 dependent credit the next year.

Add it all up and my tax increase for next year would be about $2,100 under the Senate bill, compared to my earlier estimates of $3,000 for the House bill and $4,000 for Trump "framework".  However, our 2019 tax increase would likely be back over $3,000 as my youngest turns 18.

There are significant differences in the plans on tax brackets, state and local tax deductions, mortgage interest deductions, and business income but these differences would have little or no effect on our personal situation.  Under all iterations of the Republican tax bills, we would fall back to the enhanced standard deduction, and thus lose benefits of personal exemptions and itemized deductions.  As discussed in earlier posts, this would increase our taxable income by about $30,000, and that is the primary reason our tax bill would increase despite a marginal decrease in rates and elimination of the AMT. 
----------------------------------------------------------------------------------

P.S.  I should note that there is a provision that would greatly impact my family under the House bill that I did not include in the earlier post, taxation of tuition reduction benefits for higher education employees.  I did not include it because it would not apply to a typical upper-middle class California homeowner who itemizes deductions, and I was using my personal circumstances to highlight general effects on similarly situated California families. 

Without going into the details of our personal situation, I will just say that the higher education provisions in the House tax bill would add about $10,000 per year to our family's college education costs over the next 6 years of kids.  It's not clear whether that increase would come from us paying additional tuition or additional taxes on some of my employee benefits, but in any of the likely scenarios, it is about $10k per year for us.  Needless to say, I am rooting for the Senate version of the bill over the House!

As I mentioned in the previous posts, just because its bad for my family doesn't make it bad policy.  One can reasonably argue that this is fair and just puts us higher education employees on the same playing field as everyone else.  In fact, many public university employees - including UC faculty - have no comparable benefit. 

Thursday, November 2, 2017

Update: Republican/Trump Tax Plan Would Raise My Taxes by about $3,000

A few weeks ago, I estimated the Trump tax plan would raise my families taxes by over $4,000 and most likely close to $5,000 per year.  This morning, the detailed tax proposal was released and I have recalculated our tax increase to be between $2,500 and $4,000.  [The range is primarily due to my uncertainty about whether we would receive a new credit for $300 per individual that did not qualify for the expanded tax credit.  We would not qualify for the $1,600 tax credit due to my dependent children being 16 or over, and income phase outs.]

The three most significant changes:

  • Tax bracket details:  The most significant to me and most households is that the 12% tax bracket extends farther than the 15% tax bracket in current code.  Specifically, under current law, the 15% bracket ends at around $76,000 for married filing jointly, whereas the Republican proposal would have a 12% rate up to $90,000 for married filing jointly.  In my previous calculation, I assumed 12% rate ended at same income level as current 15% rate.  This extended bracket saves me about $1,800 in taxes compared to my initial calculations.  The proposal also retains the 39.6% rate for incomes over a million dollars but that doesn't affect my family.
  • Property Taxes deductible up to $10,000:  This is a compromise on the state and local tax deduction controversy.  For my household, it wouldn't matter.  It would bring our potential tax deductions from about $18,000 to just under $24,000, the new standard deduction, so we still wouldn't itemize.  However, this could help reduce the hit on some California households.
  • Future mortgage interest deduction capped at a $500,000 mortgage, reduced from current cap of $1 million.  This could have interesting effects on California housing, especially in high-cost coastal areas.  In some ways, you could think of this as paying for the return of the property tax deduction.  If you are buying a Bay Area house with a jumbo mortgage, you will still get to deduct property taxes under this new proposal but that will be offset by this new limit on your ability to deduct mortgage interest.
So people like me are still facing an unpleasant tax increase from the Republican/Trump plan, even if it is not quite as large as I originally thought.   

Wednesday, October 25, 2017

San Francisco-Stockton Regional Airport? Right Idea, But Wrong Name

There has been some rough press and a lot of making fun of the Stockton Metropolitan Airport's proposal to change it's name to the San Francisco Stockton Regional Airport.

I have written previously about the benefits of a broader regional vision for the Stockton airport that would include a renaming, but never suggested San Francisco-Stockton.  Given the backlash, I doubt the County will go forward with this name change, but the attention it has received could be used positively for the County to think about the airport's future and how it fits within a broader economic development strategy.

Airports are highly visible and valuable regional infrastructure, and thus are a great opportunity to link regional collaboration and regional branding.  There are two levels of regionalism that should be considered here.  At CBPR, we have written extensively about the need for North San Joaquin Valley counties (San Joaquin, Stanislaus, and Merced) to work together more to become a cohesive sub-region of the Northern California Megaregion.  We have identified 3 key areas to focus these efforts: 1) marketing/branding, 2) infrastructure planning/development, 3) workforce development and education.  This airport question touches the first two.

If I were to attach a second name to the Stockton airport, it would be the Stockton-Modesto airport.  That idea is not popular with those in Modesto who still hold out hope for reestablishing passenger service at their small runway airport, but I think people in Modesto will ultimately vote with their feet as Stockton airport grows.  Modesto should collaborate and help facilitate that growth as their citizens would benefit greatly from a decent regional airport within an easy 30 minute drive, and Stockton provides the best opportunity as it has better current infrastructure (much larger runway, easy freeway access, larger local population base, and existing passenger service). 

However, I think the best idea is to go with a name that positions it within the Northern California mega-region without upsetting any other specific cities, whether they are San Francisco or Modesto.  If done right, it could help rebrand not just the airport, but the region itself.

For example, why not "Northern California Gateway" airport? 

A real marketing professional would probably come up with something better, but the idea is brand as part of Northern California, not the Central Valley, Stockton (or even Modesto).  Rather than quickly adopt or reject this San Francisco-Stockton proposal, I suggest the County use the idea of renaming the airport as an opportunity to convene a broader discussion about regional identity, branding and collaboration.  At the end of the process, they would hopefully get broad buy-in around a new name for the airport, and perhaps a start towards broader initiatives to create a more positive regional brand. 

Sunday, October 15, 2017

Trump tax plan would raise my family's taxes by over $4,000.

I have been reviewing the new Republican tax plan framework, and noticed that my family pretty much defines the profile of households that would see a tax increase: upper middle-class families in a high-tax state that itemize deductions.   Following the assumptions of the Tax Policy Center, I used my 2016 tax return to calculate the potential change for my family and received quite an unpleasant shock from what the President calls the largest tax cut in history.

The big change in the proposal for households would be to eliminate exemptions and deductions for state and local taxes, while increasing the standard deduction and child tax credit.

Currently, my family takes $16,200 in exemptions (family of 4) and we had $38,000 in itemized deductions last year (of which about $20,000 were state/local income/property taxes, and the rest mortgage interest and charitable giving).  The exemptions and itemized deductions resulted in our taxable income being $54,000 less than our gross income.

Under the Trump Plan, we would no longer itemize deductions because we would lose the state/local tax deduction and the remaining interest/charity deduction of $18,000 would be less than the new standard deduction of $24,000.  We would also lose the exemptions, so our taxable income would be $30,000 more since the total of our exemptions and deductions would be reduced from $54,000 to $24,000.  This additional $30,000 in taxable income under the Trump Plan would have a 25% federal tax rate, and thus would raise our taxes by $7,500 per year.

However, we would get some offsetting tax reductions under the Trump/Republican plan.  It would eliminate the Alternative Minimum Tax, so I would avoid $450 in AMT from last year.  My kids are dependents between the ages of 16 and 25, too old for the child tax credit, but we might get up to a $500 tax credit for each one under the new non-child dependent tax credit (depending on an income phase out).  Finally, the tax rates are a little bit lower, our marginal rate would be 25% instead of 28%, the exact dividing lines for the brackets is uncertain but the lower rates look to save us about $2,000.  So I estimate $2,500 to $3,500 in offsetting tax reductions.

Put it all together, and our family is a clear loser, as our federal income tax bill will go up at least $4,000 and possibly by $5,000 depending on assumptions.  Most households would receive some level of tax cut, as only 30% of households itemize deductions that are most likely to trigger an increased tax bill.

One of the interesting economic questions is whether this will change the behavior of households like mine.  Losing the state and local tax deduction makes paying California taxes more painful, not enough to make us move, but it could affect a few decisions of whether to move in or out of the state.  Perhaps most importantly, it will make it harder to pass state and local income and property tax increases in the future.  The real estate market and charitable giving could also be affected.  This indirect loss of the mortgage interest deduction increases our cost of home ownership right now, but it has no effect on our past home buying decision.  But losing this mortgage subsidy will affect how much we are willing/able to spend on a home if/when we move again, and considering many households in the same situation, this should somewhat reduce demand for owner-occupied housing in heavily impacted state's like California.  Charities probably won't feel too much of an impact, but some could indirectly if they depend on middle/upper-middle class households who stop itemizing.

In theory, lower marginal tax rates will give us more incentive to work and earn income.  I teach my students some core tenants of tax efficiency (low rates on large base) and this structure of eliminating deductions with lower rates would seem to fit the bill.  However, this is eliminating a deduction that subsidizes my state income tax rate, so it doesn't do much to lower our combined marginal tax rate.  Here is some math to illustrate:  How much tax will my family pay on an additional $10,000 in income?  Under current law, we pay 9.3% state tax, then deduct this from federal income before applying a 28% rate.  State tax on $10,000 is $930, federal tax = .28*$9,070= $2539.60 for total tax of $3469.60 or 34.7% of $10,000.  Under this proposal, we can't deduct the state tax, but pay federal taxes at 25%.  Our state tax is the same, but the federal bill is .25*$10,000 = $2,500 for a total tax of $3,430 or 34.3% of $10,000 in income.  So while it seems like the Trump tax plan would lower our marginal tax rate by 3 percentage points, it only reduces the combined rate by 0.4 percentage points from 34.7% to 34.3%.  That's barely a change at all, and thus does little to impact incentives for work and investment for those who itemize deductions in California or any state with a significant income tax.

Not everyone in my extended family will get a tax increase, as most people who don't itemize deductions will see a small cut.  For example, my parents do not itemize and do not take exemptions for kids, and are in the 15% bracket.  They will do better with the new $24,000 standard deduction than their current exemption/st. deduction of $18,600, and will be paying 12% at the margin instead of 15%.  So my parents will probably save about $1,000 under this plan.  Maybe that will buy them some plane tickets to come visit us, because tickets for my kids to visit their grandparents could be one of the things we have to cut to pay for our new taxes.

All of this could change and Congress is being lobbied heavily to not eliminate state/local tax deductions (especially California republicans) and to not eliminate exemptions.  And Trump has had a very hard time getting things through Congress.  Thus, my guess is our taxes will not really go up by this much.  But I have more personally at stake in this debate than I realized - and maybe you do too if you are a Californian who itemizes deductions like most homeowners with a mortgage.

It's not necessarily bad tax policy just because my taxes would increase, and I admit that it is hard to be an objective analyst when you are one of the few looking at a steep tax increase in the context of a very large overall tax cut.  There is a case for eliminating the state/local tax deduction and even reducing exemptions.  However, I thought something like this would come with much larger offsetting cuts to individual marginal tax rates, but the Trump/Republican plan is reserving the large cuts in marginal rates for corporate taxes. 

November 2:  See my update as new details have been released.


Tuesday, October 10, 2017

Does Northern California Have a Chance To Get Amazon HQ2?

Everyone is speculating about where Amazon is going with its HQ2.  Does Sacramento or the Bay Area have a chance?  Given the national competition, it's obviously a long shot, but not impossible.  If forced to pick one city (and I have not seen any betting platforms for this, let me know if there is), I would bet on Denver, but I think NorCal's chances are better than the conventional wisdom.  Here are my current thoughts (originally published in our October economic forecast).

Last month, Amazon took the unusual step of issuing a public request for proposals for a second headquarters location. It is a massive project that the company states will bring 50,000 high-paying jobs and 8 million square feet of new investment to the winning city.  Hundreds of cities have announced that they will be submitting proposals for a rare project that has the scale to alter the economic trajectory of a region.  Speculating about where Amazon will land has been widespread in the business press, and the most frequently predicted cities are Denver, Austin, Boston, Atlanta, and Washington D.C.  Most commentators have written off California, primarily due to its high cost, regulatory climate, and its historical reluctance to offer big incentive packages to corporations.

Why did Amazon go to the unusual step of creating such an open and public competition?  Surely, they must have a short list of cities that meet their requirements.  Some think it is just a publicity stunt to enhance Amazon’s brand as an economic development prize, possibly to stimulate even greater local incentive offers for its growing network of less exciting facilities such as fulfillment centers.  Perhaps their preferred locations are in states and cities that are historically unlikely to offer large public incentives, and the open competition is a way of generating public pressure for these areas to get more aggressively in the incentive game.  This latter theory would suggest that California does have a chance.  Indeed, Amazon has some very good reasons to look at the Golden State.  The Bay Area has the largest concentration of tech industry talent that Amazon needs.  California is a global destination that has proven it can attract top tech talent from around the world.  Finally, a location in the same time zone as the Seattle headquarters would facilitate collaboration and travel between the two headquarters.  We conservatively estimate that Amazon HQ2 as described in the RFP would support 120,000 on-going jobs statewide, and over $6 billion in state general fund tax revenue during the first 20 years of developing the new locations.  While California is unlikely and shouldn’t match the massive tax abatement incentives that will undoubtedly be offered by some locations, state and city leaders should definitely put their best case forward, most likely with a package of tailored infrastructure and workforce development programs.

Are there locations in the Northern California megaregion that can compete?  Most people believe that the Bay Area is simply too costly and congested, and lacks well-located sites that could accommodate the growth Amazon seeks (although Concord does have a large intriguing site, and Oakland and some other cities also are arguing they can handle it, perhaps in clusters located around the BART network).  Sacramento is more affordable, meets the size and infrastructure requirements (assuming the expanded airport continues to add more flights) and has several interesting locations that could accommodate the growth.  But can a government dominated city with a small corporate presence convince Amazon that it is business-friendly and has the workforce and culture Amazon seeks?  Sacramento can offer Amazon an opportunity to grow into a region’s dominant corporate presence where it shapes the region’s future, and a location that is attractive for some Bay Area workers seeking a more affordable family-friendly environment.  Some have speculated that Amazon could end up splitting the new headquarters between two sites, a scenario which could create interesting possibilities for the Megaregion.  While the competition is fierce and it remains a long-shot, we believe a good case can be made for a Northern California location for Amazon HQ2 and encourage the state and regions to come together and put forward a competitive proposal.


Sunday, October 8, 2017

In the nation's poorest big city, tunnel supporters push to raise water bills based on nostalgia instead of facts.

After 11 years of planning, the $17 billion WaterFix project has no viable financial plan (other than approving a blank check from southern california water ratepayers), no benefit-cost analysis justifying the project, a negative environmental assessment, and a small and highly uncertain water supply effect.

So how does the Governor, Metropolitan Water Districts and other leaders sell a rate increase of substantial magnitude to poor households to pay for such a poorly-justified legacy project?  With a mix of nostalgia, hyperbole and fear.

The LA Times editorial board echoed this weak case for the tunnels in its Sunday editorial, "Stop waffling over the delta tunnels and dig."  Without even mentioning the recent news that the tunnels' already shaky finances were blown up by Westlands Water District and Bureau of Reclamation's decisions not to pay for the tunnels, the Times gives a strong endorsement a few days before Metropolitan Water District votes.

One might expect some thoughtful discussion of ratepayer effects and how to pay the colossal costs.  This is especially true given that Los Angeles has the highest level of poverty of any big city in the U.S., with the enormous and rising cost of living for LA households the largest contributor to the city's biggest crisis.  Instead, ratepayer effects were brushed aside with this dismissive, fact-free statement at the end of the editorial.
One thing urban ratepayers can count on, though, is that their water bills will go up. The issue is whether they will be paying more because they are financing a project that keeps a sustainable amount of water coming to them, or because there is no project and water therefore becomes a scarcer and more precious commodity. 
Rather unbelievably, they are asserting that there will be no difference in rates with and without the project.  Even the most deceptive pro-tunnel propaganda doesn't make that claim.

When it comes to modern, more sustainable alternatives for water supply, the editorial says - yes, we need to build and pay for all of that too.  This argument that assumes household water bills are an unlimited resource in the nation's poorest city.  There is no need to prioritize, buy it all!

LA is a city with serious economic issues.  It needs a spark from new industries with growth potential, not higher household bills for outdated legacy projects.  It could be a worldwide hub for the next generation of water technology, a silicon valley of water tech, creating jobs and economic development while it solves its own water challenges by developing and deploying technologies that can be replicated and sold around the world.  Rather than direct LA ratepayer dollars in this forward-looking direction that would give the City an economic boost in the short and long-term, tunnel backers would prefer to cement (literally) its water future to an outdated approach that creates environmentally destructive one-time jobs hundreds of miles away.

The editorial boldly argues that the tunnels are good for the rest of the state too.  I guess those Westlands farmers who voted no and residents of the Delta counties are just too stupid to know what's good for them.  It says it will be good for the delta's environment, repeating advocates propaganda and ignoring the actual scientific assessments.  It says it will benefit agriculture, ignoring the assessment of the farmers who would supposedly benefit.  And it says it is good for the entire state's economy because we are all interconnected.  Wrong.  Because the state is interconnected, the whole state would benefit if LA were to choose to invest new technologies, greater regional self-sufficiency, and reduced reliance on the Delta.

Ultimately, the piece is nothing more than nostalgic praise for the great, "ingenious" water projects of the past, and a desire for one more giant project to complete the legacy of the last century.  It's impatient call to "stop waffling and dig" is reminiscent of Governor Brown's comments about "analysis paralysis" and "I want to get shit done."

These kind of statements feel good and sound decisive, but they actually prevent California from moving forward.  Absent an enormous, unjustified and unlikely subsidy, there is no viable path forward on the tunnels.  Rather than being decisive, these sentiments can only force the state into wasting another decade of time and money on a project that simply won't work.  The editorial should be titled, "Stop waffling, and vote no on the doomed delta tunnels."

Saturday, September 23, 2017

City of Stockton Buys Waterfront Towers for New City Hall

Just a few years after coming out of bankruptcy, the City of Stockton is paying cash for a pair of waterfront towers to serve as its future city hall.  I was skeptical when I first heard about this plan, mostly concerned about the City spending a large chunk of its reserves when it is projecting some tight budget years in the next decade and has yet to reach its staffing goal for the police force.  After taking a closer look, I believe this could work out well for the City in the long-run.

There is no disputing that the current City Hall is unsuitable, even for a City coming out of bankruptcy.  Staff estimates that the waterfront towers will be $4 million cheaper than following the current plan of moving into leased space on 400 E. Main Street, the building the City originally purchased for a new city hall in 2007, but lost to Assured Guaranty during bankruptcy.  I haven't reviewed those calculations (I wonder if they account for the cost of taking the WaterFront Towers off of the City's property tax roles).  However, I can see some reasons why this move makes sense even if the savings are less than projected.

The 400 E. Main Street is twice as big as the City needs, and a City Hall is an awkward co-tenant in an office building.  Even if the City owned it, this would be a less than ideal structure - the City made a foolish and rushed decision to buy it in 2007.  It doesn't sound like the City is having a good experience with its bankruptcy antagonist Assured Guaranty as a landlord, which is understandable.  It will be interesting to see what Assured Guaranty does with this office building over time after the City moves out.  The space may become more attractive to other tenants after the City moves out.

The Waterfront towers are the right size for the City's needs, and there is a lot of excitement about the big parking lot - even if a big surface parking lot seems like a lousy use of waterfront space.  Interestingly, the City is also actively marketing 3 vacant lots in close proximity to the Waterfront towers, including a large waterfront parcel adjacent to the Towers parking lot, as well as a 3.5 acre lot directly across the street from the future City Hall.  Rather than sell the lot across the street, the City might consider moving their employee parking lot there, and consider selling a large share of the current parking lot with the adjacent waterfront parcel.  It seems to me that would make the waterfront property much more valuable, and would reduce the amount of waterfront space dedicated to surface parking.

I hope the purchase and renovation goes well for the City.  Having been to multiple meetings in both the current and future city halls over the years, I can attest that this will definitely be an upgrade.

Monday, August 28, 2017

WaterFix declining trend

I recently started adding this table to presentations about the Delta tunnels.  It generated a lot of comments, so I will add it to the blog.



Water agencies promoting the Delta tunnels say they are worth investing in because of the downward trend in water exports from the Delta under the current system, and the prospect of additional regulation if the Delta environment and fish species' continue to deteriorate.  The implication is that the WaterFix will stop the decline, but is that justified?

The table above was compiled directly from the BDCP/WaterFix documents over the years.  It's clear that the water supply from the tunnels is also on a declining trend, there are more regulations still to come, and there is no protection from future regulations under a Section 7 permit.

In addition, the biological opinions found that endangered and threatened fish species fare worse with the tunnels than under a No Action alternative.  Since it is the decline of fish populations that is triggering increased regulations, there isn't a strong reason to believe that additional regulations are less likely with WaterFix than without.   

Can $3 per month really pay for the Delta Tunnels?

Metropolitan Water District and the LA Department of Water and Power have recently released reports saying the Delta tunnels are affordable because they will only cost the average household about $3 per month.

And they have white papers to back it up.  Rather than check the math in those white papers line by line, I suggest taking a step back to see if it adds up.
  • Assuming no cost overruns, estimates for the annual debt service and operations of the tunnels are between $1 billion to $1.5 billion per year depending on financial assumptions.
  • $3 per month ($36 per year) multiplied by 7 to 8 million households in areas served by the tunnels results in $250 to $300 million per year in revenue.  That's about 25% of the estimated cost.  
So who is paying the other 75%?  

It appears that these white papers are still assuming 2/3 of it will be paid by farmers and wildlife refuges.  About 10% is assumed to be paid by businesses like shopping centers (most of which ultimately comes back to households through higher prices or lower incomes).   

Until there is a complete financial plan and cost allocation that includes clear explanations of critical issues such as who pays cost overruns, what happens when entities opt out or default, and what sort of reserves are needed to cover payments during droughts - it will be impossible to say what the average household will pay.   

For now, I am standing by my old prediction that urban households will end up paying about 90% of the cost through a combination of water bills, property taxes, and other forms of indirect subsidy.  If interest rates stay low and current cost estimates are accurate, it could still exceed $100 per year.   

Sunday, August 20, 2017

How much should it cost to build affordable apartments in downtown Stockton?

There is no disputing that there is an affordable housing crisis in California, and finding more funds to subsidize affordable housing development will be a major focus of the state legislature this fall.  However, Governor Brown has been hesitant to support more funding for existing affordable housing programs until something is done to bring down the costs of these developments.  He is right to be concerned, the cost of developing income restricted rental units is significantly higher than the cost of building market rate housing.  It's an issue that is starting to get scrutinized on a national level, but like most things housing, the issue is on another level in California.

This weekend, the Stockton Record ran a story about a $30 million proposal to build 62 affordable units on Miner Avenue in downtown Stockton.  That's $483,000 per apartment, although the proposal includes 11,000 square feet of retail, so the apartment costs are probably closer to $400,000 per unit.  For comparison, you can buy a brand new single family home in Stockton right now for under $350,000.

To be fair, the cost of this Stockton affordable housing proposal is not unusual, and I am happy to see Cort and Ornellas' efforts to expand housing in downtown Stockton.  In fact, just before this article ran in the Record, I had written half this blog post inspired by a similarly costly proposal in downtown Roseville.  

Part of the problem is that the government subsidizes most affordable housing projects with tax credits that must be packaged and resold to private investors.  This is a very costly way for the government to provide capital to these projects.  A recent investigative story on NPR's Frontline describes why this system can be expensive, and how this system of finance is failing to build enough housing from a national perspective.  While much of the focus in California has been on reducing regulations to lower development cost for affordable housing, I think the approach to finance should also be reconsidered.  

I suspect there is much more to this story, and I wish I had more time to focus more deeply on these housing supply issues.  I know there are good people working on innovative approaches to reduce costs and expand supply.  In fact, I recently learned that Stockton's David Garcia will be working with the Terner Center for Housing Innovation at UC-Berkeley which has assembled an interesting team and portfolio of projects.   


------------------------------------------------------------------------------
Addendum 9/17:

Most people I have discussed this issue with recently have pointed first to prevailing wage requirements as the biggest cost driver, an important issue I somehow overlooked in the discussion above.  This article in the LA Times discusses the issue and has links to several studies of the topic.
http://www.latimes.com/politics/la-pol-sac-construction-workers-housing-20170512-htmlstory.html

Friday, August 18, 2017

1) Davis Biologists Reject Water Agencies Main Argument for the $16+ billion WaterFix/Tunnels, 2) Then they endorse the Tunnels, and 3) WaterFix sends positive news release touting their support

Over the past decade, I have sometimes heard the PPIC/Davis water group described as "useful fools", who unwittingly support the further environmental demise of the Delta.  This week, a pair of prominent UC-Davis biologists gave the Delta tunnels (aka WaterFix) a qualified endorsement .  Their timing, reasoning rationalization and subsequent reaction from the WaterFix public relations machine reminded me of this political phrase.

For the past few weeks, the WaterFix discussion has been dominated by discussions of whether the Delta tunnels are worth $16+ billion to water agencies.  In making their economic/financial case, water agency staff have consistently maintained that if we don't build the WaterFix, water exports from the delta will be slashed to 3.5 - 3.9 million acre feet annually, which is essentially cutting exports back to pre-1980 levels.

The UC-Davis scientists (Peter Moyle and James Hobbs) included this as the 3rd of 4 options they list as alternatives to the WaterFix, "3. Roll back water delivery volumes to pre-1980 levels." However, in direct contradiction to the current arguments of those pushing the Waterfix, these eminent fish experts eliminate the option of cutting water exports because they view it as politically infeasible.  With the best option for fish thus dismissed, they endorse the WaterFix while falsely suggesting that the habitat improvements in Ecorestore can only occur with the tunnels/WaterFix.  Here is their specific language...
So, the best option for smelt, and other native fishes, especially salmon, is #3, because it should result in a large increase in freshwater flows through smelt habitat...  The realities of California water politics, however, dictate that one of the other three options is much more likely to happen. Of these options, the WaterFix + EcoRestore option deals best...
Image result for fish cartoon with friends like these

Predictably, the WaterFix public relations machine quickly sent out a news release touting the "optimistic assessment" of these UC-Davis scientists.  It doesn't matter that the argument completely contradicts their economic argument for WaterFix or that their endorsement is qualified with conditions that are inconsistent with the WaterFix project description (see the drought operations in detailed project description).

Image result for pounding head against wall

This episode, like so many other with WaterFix, underscores the need for a feasibility study in which economic, environmental, and technical feasibility are simultaneously evaluated under a common set of assumptions.  Feasibility studies are commonly conducted and often required for water infrastructure projects, but one does not exist for WaterFix, despite the tens of thousands of pages of reports.

Rather than a consistent, unified analysis to ground a reasoned discussion of the WaterFix, its supporters present confusing information where the assumptions and arguments change for every audience and purpose.  In this case:

WaterFix booster to ratepayers: "Support WaterFix, because without it water exports will be cut to pre-1980 levels."
WaterFix booster to biologist/environmentalists:  "Support WaterFix, because there is no way that water exports will be cut to pre-1980 levels."

-----------------------------------------------------------------------------------------------------------

The most irksome element of the Moyle/Hobbs post is their dismissal of the best alternative for the environment.  Clearly, the political screaming about the delta smelt has influenced them.

But the rest of the Moyle and Hobbs reasoning/rationalization behind their WaterFix endorsement deserves a few comments too:
  • It completely ignores the cost and economics of WaterFix, and the critical linkage between paying the $16+ billion cost and the conditions and trust issues on which their endorsement relies.  (i.e. Do they seriously think that TUCPs are less likely after water agencies are saddled with billions in debt payments?)  
  • They invalidly link Ecorestore to the Waterfix, ignoring the fact that Ecorestore can and will go forward without the WaterFix.  In fact, it might even be more likely if the tunnels aren't consuming so many financial resources.  
  • It considers a very limited range of options to WaterFix (although more than the EIR which ignored the decreased exports scenario)
  • They dismiss the "status quo" without mention that the biological assessments of the WaterFix find that it is worse for fish the status quo, and that "status quo" leaves water agencies with $16+ billion to advance their water supply goals in other ways.
  • Their surface-level discussion of the levee collapse scenario only links a 2007 discussion of the topic - ignoring that a decade of research and experience since then has shown that the scenario is a) less likely, b) would cause a shorter water outage, and c) that levees have improved/not deteriorated and could be further improved to protect against this scenario.  
  • It views Delta options from the narrow Delta fish vs. water exports perspective.  I might give biologists a pass on this if their argument was not so heavily based on the scenario of a levee collapse that could kill hundreds of people and have broad economic and environmental consequences that dwarf the interruption of water exports and an emergency freshwater pathway.  I am really surprised to see this callous approach in the wake of the Oroville crisis that caused tens of thousands to flee for their lives.
Despite these many flaws, there is one piece of information of value in this post from prominent fish biologists.

They conclude that option #3 is clearly better for fish than the WaterFix.  

That is very valuable information, and it should be noted, it also contradicts the arguments made by proponents of the WaterFix.

Friday, August 11, 2017

Initial reaction to Metropolitan Water District Financing White Paper

I am leaving for the airport in 30 minutes, but judging from my Inbox, there is a high demand for a reaction to Metropolitan Water District's recently posted white paper on financing and ratepayer costs of the Delta Tunnels.  Here is my reaction after an initial review.

All the calculations and modeling in the paper relies on 3 huge assumptions which are almost certainly false.

  • It assumes farmers (and wildlife refuges) pay the vast majority (approximately 2/3) of the estimated $17 billion cost.  Multiple analysis and statements by various potential participants have shown this is unlikely.  Drop this assumption, and Met's cost share could triple.
  • Cost comparisons are based on an assumed average annual yield (incremental increase in water supply) of 1.3 million acre feet per year.  This is a wildly optimistic estimate.  The WaterFix official documents (permit application) is based on an annual average yield of 225,000 acre feet.  Using more realistic and correct yield estimates increases the incremental cost of the project by a factor of 6.  (This issue is a bit wonky and I will have a future post that tries to simplify the issue and explain why it is more than an academic debate that could come back and bite water agencies and ratepayers.)  At minimum, board members should demand/expect to be shown cost comparisons over a range of plausible project yields - not just the base scenario.
  • The paper describes a host of critical financing issues as still "under negotiation" or being developed.  Agencies have been working on these issues for years and still have not come to a resolution.  The paper assumes all these issues will be handled in way that is satisfactory to the board.  Ratepayers, taxpayers and board members should be very uneasy about the way these issues are being deferred to the future.
One of the key issues where all 3 of these bullet points interact is what happens if (when) some agencies choose not to participate.  The white paper hints (and I have heard a few water agency board members suggest this too) that it could be a good business opportunity because they can pick up extra water from the non-participants.  Not so fast, there are a lot of downsides and risk here.

For one, how will they determine the water supply the non-participants receive?  They will not be using the no-tunnel baseline that results in the 1.3 maf yield calculation, thus handing over their water allocation to MWD.  They will use the baseline in the official permit applications (with good justification), and this is just one of the ways where the rosy projection of 1.3 maf of water yield made by MWD staff could disapear.

A few other notes:
  • Costs for the Contra Costa Water District settlement and new tidal marsh from the Biops do not appear to be included.
  • The other big projects from the past in the comparison chart are all urban projects.  None of them were counting on farmers and wildlife refuges to pay 2/3 of the cost.
  • Few details included about how this JPA issuing bonds will work, and how the 45% CVP share will be paid directly?  
  • If MWD does pick up transferred shares from others - how will those be paid?  Will MWD have to guarantee to accept transfer or purchase of unwanted allocations in order to finance the project?
  • How will cost overruns be handled?
  • Most businesses are owned by local people, so the non-residential costs fall on them too.
  • What about comparing the cost of tunnel water to conservation/efficiency, stormwater capture, and other more cost-effective options.
Off to airport security.  Fortunately, I understand the MWD board won't be voting on this until late September so there will be time to ask and hopefully receive better answers to these questions than the white paper provides.  This document surely doesn't provide the information that is required to make a public policy decision of this consequence.


Wednesday, August 9, 2017

WaterFix results in $1 billion in harm to winter-run chinook salmon according to California guidelines used for storage projects

Two major water infrastructure policy processes are moving towards critical decision points that will determine their financial viability: a) the WaterFix (Delta Tunnels) led by the Department of Water Resources (DWR) and b) $2.7 billion in Proposition 1 (Water Bond) funding towards public benefits from new storage administered by the California Water Commission.  

One of these processes (Prop 1, California Water Commission or CWC) is treating economics seriously in the planning process, while the other (WaterFix) has not.  Sadly, there is a lot more money and environmental risk associated with the tunnels project that has been ignoring and/or suppressing economic analysis of the project.    

Recently, I was reviewing the California Water Commission's guidelines for valuing ecosystem impacts from new storage projects for the purposes of awarding Proposition 1 funds.  It led me to ponder what would happen if WaterFix followed the California Water Commission's guidelines for benefit-cost, including valuing ecosystem impacts, and had to compete for funding like these storage projects.  

I believe the results would be similarly ugly for WaterFix as the benefit-cost analysis I did in 2016. Using the CWC guidelines, the value of water would be higher than I used (especially after SGMA is implemented), but the yield would remain a meager 225,000 acre feet per year.  However, the increase in benefits from higher value water would be offset by a host of environmental costs that I did not include in the 2016 analysis.

For example, the CWC gives explicit guidance on how to value changes in endangered and threatened salmon populations estimated with a life-cycle model, and the biological assessment for the WaterFix gives clear results of this type of assessment for winter-run chinook salmon.  Applying the values and procedures from the CWC guidelines to the WaterFix results in a $58 million annual loss from the damage of the WaterFix to winter-run chinook salmon.  Extended over 100 year life of the project (beginning 2031) with a 3.5% discount rate, it is a nearly $1 billion social cost from the tunnels.

The $1 billion cost is just for winter-run chinook from operations.  Thus, it does not include costs to winter-run chinook from construction or consider impacts from both operations and construction on spring-run or fall-run salmon, steelhead or delta smelt.  It would take more work (and help from biologists) to estimate values for these, but is not hard to see this adding up to a cost of several billion dollars from the WaterFix tunnels.

The applications for Prop. 1 storage money are due in a few days.  It will be really interesting to see how the different applications apply these guidelines to value the public benefits, as well as the overall feasibility and benefit-cost for the storage projects.  Then it will be really interesting to see how the CWC evaluates these applications.  That will be the real test of the extent to which economics and science or politics is allocating the funds.  

It's inexcusable that the WaterFix tunnels, despite 11 years and hundreds of millions in planning, hasn't produced any feasibility or economic analysis comparable to what these storage projects are required to do.

Thursday, July 20, 2017

Sacramento Getting Good Press. Will It Lead to Good Jobs?

Over the past 2 months, Sacramento is trending in the national press with multiple national stories connecting Sacramento and the Bay Area.  The publicity wave caught the eye of Jack Ohman, the Sac Bee's very witty cartoonist.

While most of the stories are about real estate, there have also been positive business press extending into the areas of innovation and tech talent.  See these recent articles in the business press,

Bloomberg
Entrepreneur
Wall Street Journal

Barry Broome and the Greater Sacramento Economic Council are trying to take maximum advantage by dialing up their marketing efforts in the Bay Area, and doing their part to keep the good press coming.  Here is Barry making the case for Sacramento on national Bloomberg radio : https://www.bloomberg.com/news/audio/2017-07-05/bloomberg-best-from-our-bureaus-worldwide-july-5-audio

Is it real or hype?  Most of the hard data is about Sacramento's hot residential real estate market sprinkled with some anecdotes about entrepreneurs and people that have migrated to the area.  At this point, there isn't much data beyond anecdotes to support the idea that Sacramento is seeing a migration wave of skilled workers and businesses.  I have a strong sense that there are skilled workers and businesses taking a look and "kicking the tires" on Sacramento as a destination, more than have been seen in decades.  But will they invest?

It's easy to be skeptical.  The business news over the past year or so has featured some large private employers like Aerojet and Verizon pulling out of the area.  Most of the business investment news is still about restaurants and real estate (and cannabis).  

A lengthy article this weekend on Sacramento real estate development includes a few quotes from me, but more interesting to me are the ones from some real estate developers.  They aren't seeing Bay area migrants as young tech talent, but as retirees.  The 55+ "active adult" communities have been the best selling new home product in Sacramento for a while, developers are responding with more 55+ products.  It seems much of the Bay Area demand for Sacramento real estate is from people at the end of their careers, not the beginning or peak.

As I pointed out in our Center's last forecast update, the trends for the past 5 years show workers are migrating to the Bay Areas, while non-workers are migrating out.  Areas like Sacramento, San Joaquin and Solano Counties have seen very slow labor force growth relative to their population growth - while San Francisco has seen its workforce grow faster than its population - suggesting that it is retirees and families that are being pushed inland.

However, all of this data is backwards looking and no trends last forever.  The urban core of Sacramento is also hot and becoming an exciting place to be.  The emerging Northern California megaregion is very real, and there are many people working to build a more resilient and diverse set of Bay Area connections than real estate refugees of commuters and retirees.

The next two years are going to be very telling for Sacramento.  This may be its best chance to develop its private economy and become more than a government town.

Thursday, July 6, 2017

Biological Opinions for the Delta Tunnels include new cuts to water diversions and further increase risk to water agencies that must decide whether to invest billions.

The much anticipated biological opinions (Biops) for the Delta tunnels (aka WaterFix) were said to be the documents that would provide more clarity to water agencies about how much water they would receive, and allow them to make a decision about whether they were willing to pay for the $16 billion tunnels by September.

While the Biops provided tunnel proponents a day to celebrate partial regulatory approval, the documents have done more to confuse than clarify water supply.  There is no updated modeling of water exports from the project, and there are multiple new items that increase uncertainty and could lead to future cuts to water supplies.  Most importantly, the Biops:
  • Postponed approval for building the intakes and operating the tunnels, the parts of the plan that will determine water supply benefits.  
  • Changed the rules for protective pulse flows for salmon in ways that substantially increase uncertainty about water diversion through the tunnels.  
While the "split decision" that postpones approval of the tunnel intakes and operation has received a fair amount of attention, the pulse flows have not - most likely because it is much wonkier and hard to understand.

When it comes to export water supplies, the change to pulse flows rules will have two negative effects, and one positive effect.  The negatives for water exports are that protective pulse flows have been extended to cover threatened spring-run chinook salmon in addition to endangered winter-run, and an annual cap has been removed to allow unlimited protective pulse flows.  On the positive side for water exports, the revised pulse flow rules allow for substantially more diversion of water if the pulse flow events occur when Sacramento river flows are high (35,000 cfs). (If you don't trust my summary, see page 3-121 of this document for the new pulse flows language, and page 3-123 for the old language.)

The water supply impacts of this are potentially very large.  Water diversions through the tunnels could decrease by nearly 18,000 acre feet for every additional day of protective pulse flows, and unlimited pulse flows for winter-run and spring-run salmon could add weeks where operations are constrained in this way each year. However, the rule allowing up to full 9000cfs diversion during a pulse event as long as Sac river flows remain over 35,000 cfs is likely to partially offset this effect and reduce the number of constrained days.  The net effect is probably negative, but very uncertain.

The uncertainty is compounded because the Biops do not define the specific criteria that would actually trigger protective pulse flows.  The idea is for the protection to kick-in when migrating fish are detected, but the Biops do not state the location where fish will be monitored or the number that will need to be observed to trigger protective action.

Confused?  You should be.  The tunnels may be more of a "crapshoot" today as when I heard Jason Peltier of Westlands Water District describe them as such in 2012.   The Biological Opinions do not provide water supply modeling to illustrate the potential effects of their new provisions.  Maybe they are trying to hide some bad news, but it is pretty hard to model the effects of these new pulse rules when so much is left undefined.

Appendix G does have some modeling that illustrates the effect of this rule in 11 recent years given one possible definition of a pulse event.  Appendix G is mostly about fish survival impacts, but it does have a green line on each of the 11 graphs that shows the flow of water diverted to the tunnels over the course of the year and blue bars that show the estimated frequency of pulse events.  The graphs of daily diversions are not detailed enough to calculate the water supply impacts, but my visual inspection revealed a net negative impact on water diversions in 7 out of 11 years, and 4 out of 11 years where the negative and positive impacts seem to balance out.  The biggest impact on water exports were in 2005, where I estimated about 30 additional days of severely restricted diversions with the potential to cut water exports by about 500,000 acre feet compared to the previous rules.  The fish survival predictions also show the largest positive effects in 2005, so the loss of water exports does generate substantial environmental benefits.  These positive effects on survival in Appendix G show why the increased frequency of pulse protection events was made to the description of "real time operations" in the Biops.

So where does this leave the water agencies who have to make a decision about whether to invest in the tunnels?

It seems clear to me that agencies should be less enthusiastic about investing in the tunnels than before the biological opinions were released.  The changes to protective pulse flows will almost certainly cause further reductions to expected water supply through the tunnels, and the postponement of many key decisions to the future has further increased uncertainty about the benefits of the tunnels.    

Last year, I published an analysis of the benefits and cost of the tunnels based on the draft biological assessments and EIR and found them to be a lousy investment.  If I were to revise this analysis based on the final Biops, it would only get worse as water supply benefits appear lower and environmental effects are adverse (although not expected to cause extinction).  The only potential positives for export water agencies is that they continue to have power in governance rules and political processes that give them hope that all the restrictive operating rules for the massive tunnels could be changed (or left unenforced) after tens of billions are spent on construction.

Last September, John Kirlin and I published an op-ed in the Sacramento Bee that described the Delta Tunnels (aka WaterFix) as a muddled gamble.  The Biops have only reinforced our analysis.  Some excerpts below...
You would think that after a decade and hundreds of millions of dollars spent on planning and analysis, the plan would be clear. Instead, uncertainties regarding the proposed project, environmental impacts, costs, financing and authority over operations loom larger than ever...
 The state could reduce the confusion over the WaterFix if it were to follow its own planning guidelines and prepare a feasibility study that addresses engineering, operations, environmental, economic and finance concerns in a consistent and unified analysis. Instead, the WaterFix proposal advances engineering proposals and environmental analyses that are disconnected from the project’s financial needs, combined with opaque descriptions of governance and authority...
While many water contractors have expressed concern over the tunnels’ cost, no major water agencies have walked away from the proposal despite the plan’s low return on investment.
A closer look at the WaterFix proposed governance and authority suggests how water agencies could believe the proposal may prove a better value than modeling projections show.
After construction, the critical issues for the tunnels will be operation in real time and adjustments to rules over time. The draft “adaptive management” framework is notable for placing... water contractors at the center of processes to establish science priorities and to make recommendations on possible changes in water operations...