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.   


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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."

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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...

Friday, April 7, 2017

WaterFix Economics Flop in Two Recent Federal Consultant Lists of National Infrastructure Priorities.

As the Trump administration gathers lists of national infrastructure projects, federal infrastructure consultants are finding that the California WaterFix project falls short of the state and Governor's claims about its economic performance.  That should come as no surprise to readers of this blog where I have been writing about WaterFix/BDCP/Delta tunnels lousy economics for nearly a decade.

The first report was conducted for the U.S. Treasury department and identifies 40 priority transportation and water infrastructure proposals in the U.S.  The intent of the report is to create "a list of significant transportation and water infrastructure projects that have been proposed but face challenges to completion" and have high economic benefits relative to their costs.  The high-profile tunnels project clearly hits all the screening criteria to have its benefits and costs evaluated for consideration for the list.  The screening criteria are:
  • significant (defined as >$300m)
  • estimates of capital and operating costs, and a basis for estimating benefits
  • completed a portion of environmental review
  • could be at least partially completed within 10 years
  • face a challenge to completion (technical, environmental, funding, etc.)
That is a list of project screening criteria that the WaterFix passes with flying colors.  While the WaterFix must have easily made the list of candidate projects, the Delta Tunnels are conspicuously absent from the final list of recommended projects.  Why?  Take a look a the selection criteria for the final list of 40 projects,

"The study team selected those projects for the final list which had significant net national or regional economic benefits based either on estimates of costs and benefits that had already been calculated using acceptable methods or on interim project outputs that could be converted to estimates of costs and benefits. Projects in the final list were chosen based on their net economic benefits... "


While I may have been the first, it is increasingly clear that I am not the only analyst to conclude that the WaterFix has a lousy benefit-cost ratio.  By the way, three California projects did make the final list of 40 recommended projects: 1) CA High-Speed Rail, 2) MTC managed lanes (HOV, express lanes) throughout the Bay Area freeway network, and 3) Sutter Basin flood control improvements (note, this assessment was done prior to the Oroville crisis).  Yes, it is true that high-speed rail has stronger economic justification than the Delta tunnels, although its financial viability is equally questionable.  Bottom Line: WaterFix failed to make the cut in a list of major infrastructure projects evaluated on their economic merit, while HSR and HOV lanes made it.


The second notable recent assessment was done by consultants for the Trump transition team, and looks at project financing, most notably its revenue potential for private investors, rather than its overall economic benefits and cost.  The WaterFix does make this list of 50 priority projects, but it is notable that the assessment finds that it needs a large taxpayer subsidy.  The consultants estimate that user revenue is only sufficient to pay 50% of project costs, in sharp contrast to a decade of statements by the state and water contractors that they would pay 100% of the projects costs.  As readers of this blog know, the WaterFix/BDCP/Tunnels have never issued a draft financial plan, and they suppressed their own economic consultants assessment that the project required a large taxpayer subsidy

Here is a list of the 5 California projects that made the transition team list, along with their estimated construction cost and the % of these costs that could be paid by facility users.
  1. I-405 Improvements, $1.9 billion, 50%.
  2. Veterans Health Research Institute, $1 billion, 90%.
  3. Cadiz Water, $250 million, 100%.
  4. Huntington Beach Desal, $350mil, 100%.
  5. CA WaterFix (Bay Delta Tunnels), $15 billion, 50%.
As I have mentioned frequently, WaterFix economics are much worse than desalination (frequently criticized for high costs) and it appears the transition consultants agree.  It is also interesting to compare the WaterFix to the other CA project that was assessed to have user revenue equal to 50% of costs, the I-405 project in Orange County.  Unlike the WaterFix, the I-405 project actually has a finance plan.  The I-405 finance plan clearly states that 2/3 of the $1.9 billion construction cost would be paid by taxpayer funds, and yet the transition team consultants give it the same 50% revenue/subsidy rating as the WaterFix.  That is probably because the I-405 finance plan estimates that revenue from the toll lanes will comfortably exceed what is necessary to pay 1/3 of the capital cost, so the transition team consultants evaluated its revenue potential at 50% rather than 33%. 

It amazes me that anyone still believes public officials who say the tunnels can be built without substantial taxpayer funds.  While it has taken a long time, the media and the public are slowly catching on.  And now it appears that infrastructure consulting firms working for the federal government, who have a strong incentive to promote mega-infrastructure projects, recognize that the project can not be financed as claimed by project proponents and that the overall economic justification is lacking.
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There is a more general observation about these lists that should be of interest to water wonks and policy makers.  When it comes to water projects, the two lists recommend very different types of projects.

The Treasury list evaluates projects on economic merit, and flood control projects dominate the recommended projects.  It's true around the U.S., not just California.  However, the public good characteristics of flood control and constraints on accessing taxpayer funds makes flood control difficult to finance even when the economic merit is high.

In contrast, the Trump transition list evaluates projects on their revenue potential to attract private investment.  Water supply projects like Desal, Cadiz, and WaterFix rank high on the list of projects with private investor potential even though they can't make the previous list based on overall economic merit.  That's because water utilities have a lot of power to recover their investment costs from ratepayers, no matter how ill-advised those expenses may have been.

[This last section and a few general edits were added on 4/8.]

Wednesday, March 29, 2017

Bay Area Net Domestic Migration Shows Large Drop in 2016, While Stockton and Sacramento Have Relatively Small Gains

Census released metro area population growth data for 2016 a few days ago, and it shows a large increase in out-migration from the Bay Area, but little change in domestic migration for inland parts of the mega-region.  Specifically, Bay Area net domestic migration declined by over 30,000 people in 2016, as shown in the table below.

Net Domestic Migration in Thousands (July 1 previous year to June 30)
2016 2015 2014 2013
San Jose -20.8 -10.1 -7.2 -1.4
San Francisco -12 0.1 -0.3 2.4
Oakland -1.1 8.8 14.1 13
Sacramento 12.3 9.1 8.2 3.3
Stockton 4.2 3.7 3.8 -3.9


Unfortunately, we don't have any data yet for 2016 on how the net domestic migration change breaks down between in-migration versus out-migration.

My guess is that more of the 2016 change for the Bay Area results from a slow-down to in-migration due to slower job growth and high cost of living.  If the net change were mostly due to an increase in out-migration, then I expect we would have seen a larger increase to net migration for Stockton and Sacramento.  Between 2013 and 2015, we saw a smaller decrease in Bay Area domestic migration and a larger increase to Stockton/Sacramento domestic migration.

Monday, February 13, 2017

Does Equality of Opportunity Study Suggest Community College Should Be Free?

An op-ed in today's Sacramento Bee uses the Equality of Opportunity study to argue that the state should make community college and the first two years of CSU tuition free.  I am not sure how the op-ed author derives his conclusion from the analysis in the Equality of Opportunity study.

I had skimmed the study a few weeks ago and did not come to these conclusions.  I thought it raised serious questions about California's higher ed structure with an enormous community college system and strong incentives for students to start in community college.  California has had the cheapest (nearly free tuition) community college education in the U.S. for decades and its educational outcomes are backsliding, especially for those under 40 who were educated in the state.  California still does a great job of attracting highly educated workers to move here from other places.

Prompted by this op-ed, I just gave the study another read to see if I was missing something.  I found no recommendation about free community college or expanding community college.  In fact the study notes that many community colleges don't rank that well on mobility, despite being high-access institutions because their success rates are so low.  It does have positive things to say about outcomes for students who start in the CSU system.  I could see it as an argument for expanding CSU's so more students can start in a 4-year environment, and I also can see it as an argument for continuing to provide financial aid opportunities that allow lower-income students to access private, non-profit institutions.

I edited some of the tables from the Equality of Opportunity study below.  There are many more community colleges than CSUs, UCs, and private, non-profits in California - so it seems they should dominate these tables.

The first table focuses on the mobility rate, which combines low-income access with success in mobilizing low-income students into the top-tier of earners.  The table shows the top 10 colleges in California (excluding very small institutions) for mobility and the bottom 10.  There is 1 community college in the top 10, but community colleges are 7 out of the bottom 10 for mobility.

The second table looks only at the success rate of low-income students attending a given university, irregardless of the share of students at that institution that are low-income.  Thus, Stanford can top this list despite only having 3.6% of students with low-income parents - since 63% of those students are successful in getting to the top income quintile by their early 30's.

When it comes to success rate, there were no community colleges in the list until 42nd place.  The very bottom of the success rate list are for-profit career colleges, but community colleges make up the rest, 15 of the bottom 20 places.

Community colleges are important, and I know many people who have had good educational experiences with them, and have successfully used them to achieve their educational goals.  The policy question here is at the margin.  Should California be putting more resources and directing more students in their direction, or would there be a better return on investment in expanding the CSU system and low-income access to private non-profits with high success rates?

Mobility Rate Rankings

Institution Name Median Parent Hhold. Income ($) Median Child Indiv. Earnings Ages 32-34 ($) Low-Income Access: % of Parents in Bottom Quintile Success Rate: % of Children in Top Quintile Among Those with Parents in Bottom Quintile Mobility Rate: % of Children who Come From Bottom Quintile and Reach Top Quintile
Top 10 Mobility Rate(>= 300 students per cohort)
California State University, Los Angeles  36,600  43,000 33.1        29.9        9.9       
Glendale Community College  40,100  30,500 32.4        21.9        7.1       
California State Polytechnic University, Pomona  80,200  55,100 14.9        45.8        6.8       
University Of California, Irvine  92,100  60,400 12.2        55.3        6.8       
California State University, Northridge  61,100  44,100 19.8        32.0        6.3       
University Of California, Riverside  75,000  52,800 14.7        41.0        6.0       
California State University, Dominguez Hills  45,600  40,300 26.3        21.3        5.6       
University Of California, Los Angeles 105,500  65,800 10.2        54.6        5.6       
San Jose State University  91,700  56,500 11.7        46.6        5.4       
University Of California, Berkeley 114,700  67,900 8.8        55.2        4.9       
Bottom 10 Mobility Rate (>= 300 students per cohort)
College Of The Redwoods  59,900  20,300 18.8        7.5        1.4       
Point Loma Nazarene University 113,300  45,900 3.3        42.7        1.4       
Lake Tahoe Community College  64,600  22,100 14.2        9.8        1.4       
Mendocino College  51,900  21,400 21.0        6.0        1.3       
Sierra College  85,900  30,900 7.8        15.7        1.2       
California Lutheran University 110,600  50,900 3.2        38.2        1.2       
Saddleback College 100,600  31,100 7.0        16.5        1.2       
Solano Community College  84,300  34,300 7.9        13.7        1.1       
Las Positas College 109,500  37,300 4.9        16.5        0.8       
Marinello School Of Beauty, Xenon International Academy, International School Of Skin And Nailcare And Hair Professionals Academy  44,200  11,400 25.4        2.9        0.7       

Success Rate Rankings

Institution Name Median Parent Hhold. Income ($) Median Child Indiv. Earnings Ages 32-34 ($) Low-Income Access: % of Parents in Bottom Quintile Success Rate: % of Children in Top Quintile Among Those with Parents in Bottom Quintile Mobility Rate: % of Children who Come From Bottom Quintile and Reach Top Quintile
Top 42 Success Rate (schools >=300 students per cohort)
Stanford University 172,600  84,800 3.6        62.7        2.2       
Santa Clara University 149,900  72,500 3.6        62.0        2.2       
University Of California, Irvine  92,100  60,400 12.2        55.3        6.8       
University Of California, Berkeley 114,700  67,900 8.8        55.2        4.9       
University Of California, San Diego 111,300  65,300 8.8        55.1        4.8       
University Of California, Los Angeles 105,500  65,800 10.2        54.6        5.6       
University Of Southern California 120,100  63,700 7.2        54.6        3.9       
California Polytechnic State University 124,800  65,500 4.2        53.6        2.2       
Pomona College 161,600  62,000 3.7        53.0        2.0       
University Of California, Davis 109,400  61,600 8.6        51.8        4.4       
University Of The Pacific  96,500  59,000 8.6        49.7        4.3       
University Of California, Santa Barbara 124,000  58,800 6.2        49.5        3.1       
Scripps College 126,300  46,400 5.1        49.1        2.5       
University Of San Diego 139,300  61,200 4.9        46.8        2.3       
San Jose State University  91,700  56,500 11.7        46.6        5.4       
University Of San Francisco 106,900  56,900 5.9        46.2        2.7       
Loyola Marymount University 131,800  56,200 5.4        45.9        2.5       
California State Polytechnic University, Pomona  80,200  55,100 14.9        45.8        6.8       
California State University, East Bay  86,000  51,300 9.9        44.0        4.3       
Saint Mary's College Of California 110,500  55,200 6.7        43.7        2.9       
Pepperdine University 124,100  55,800 4.3        43.1        1.9       
Point Loma Nazarene University 113,300  45,900 3.3        42.7        1.4       
University Of California, Riverside  75,000  52,800 14.7        41.0        6.0       
San Diego State University 100,500  51,000 9.0        40.8        3.7       
California State University, Fullerton  83,300  47,800 12.1        39.6        4.8       
Occidental College 122,400  49,000 8.5        39.1        3.3       
California Lutheran University 110,600  50,900 3.2        38.2        1.2       
California State University, Long Beach  85,800  48,800 11.6        38.2        4.4       
University Of California, Santa Cruz 115,400  46,100 7.4        37.6        2.8       
San Francisco State University  87,200  45,800 10.1        34.7        3.5       
Sonoma State University 113,700  46,400 5.0        34.4        1.7       
California State University, Bakersfield  67,700  46,100 14.1        32.8        4.6       
University Of Redlands 108,400  47,700 5.3        32.3        1.7       
California State University, Monterey Bay  93,200  41,100 10.5        32.3        3.4       
California State University, Chico 112,200  48,700 6.1        32.2        2.0       
California State University, Northridge  61,100  44,100 19.8        32.0        6.3       
California State University - Sacramento  88,700  47,900 10.5        31.9        3.3       
Chapman University 109,600  47,900 5.3        31.9        1.7       
California State University, San Bernardino  69,800  43,500 14.1        31.2        4.4       
Azusa Pacific University 103,700  42,100 4.9        30.9        1.5       
California State University, Los Angeles  36,600  43,000 33.1        29.9        9.9       
Ohlone College  91,100  38,500 7.1        29.0        2.1       
Bottom 20 Success Rate (schools >= 300 students per cohort)
Victor Valley Community College  62,600  25,200 17.7        12.1        2.1       
Chaffey Community College  66,300  27,700 14.7        12.0        1.8       
Southwestern Community College District  54,200  28,200 20.2        11.8        2.4       
Antelope Valley College  66,600  25,700 16.4        11.8        1.9       
West Hills Community College District  46,100  25,600 22.5        11.7        2.6       
College Of The Sequoias  51,500  27,500 21.8        11.6        2.5       
Yuba Community College District  48,700  25,400 20.4        11.5        2.4       
Miracosta College  71,200  26,500 13.4        11.5        1.5       
College Of The Siskiyous  57,500  27,900 19.0        10.5        2.0       
Lake Tahoe Community College  64,600  22,100 14.2        9.8        1.4       
Merced Community College  48,400  25,400 24.0        9.5        2.3       
State Center Community College District  47,600  25,200 24.7        9.4        2.3       
San Joaquin Valley College  36,000  21,500 34.8        7.9        2.8       
College Of The Redwoods  59,900  20,300 18.8        7.5        1.4       
Carrington College California  47,900  25,000 24.5        7.0        1.7       
Westwood College - Los Angeles  37,800  26,400 26.9        6.7        1.8       
Mendocino College  51,900  21,400 21.0        6.0        1.3       
United Education Institute  29,600  19,100 42.4        5.3        2.2       
American Career College of Los Angeles, CA  30,400  25,700 41.5        4.8        2.0       
Marinello School Of Beauty, Xenon International Academy, International School Of Skin And Nailcare And Hair Professionals Academy  44,200  11,400 25.4        2.9        0.7