Monday, July 9, 2018

Three Days Before MWD's Revote On Financing the Delta Tunnels, A New Regulatory Document Further Multiplies The Investment Risk

The Metropolitan Water District re-votes on their plan to finance the majority of the $17+ Delta tunnels plan tomorrow.  Over the weekend, I reviewed the information MWD staff prepared for their vote, along with the new Sacramento-Delta report released by the State Water Board on Friday that is likely to substantially reduce the water supply benefits of the tunnels.

  1. Master Agreement for the 3,000 cfs unsubscribed capacity.  (In March, staff promised this ASAP, but still nothing 3+ months later)
  2. Legal Opinions of financing additional 3,000 cfs capacity: Prop 26/128, water rights
  3. Benefit/cost analysis of financing the additional 3,000 cfs capacity
  4. Real evidence to support staff expectation that CVP will lease back the capacity (not more talk from staff who have been wrong about farmers paying for the last 10 years)
After Friday's release by the State Board, I would add to the top of this list an analysis of how the State Board's Sacramento-Delta framework will affect water supply from the tunnels.  The Delta outflow recommendations in this new document would reduce diversions from the Sacramento/Delta watershed by an estimated 2 million acre feet per year compared to existing conditions (with or without the tunnels).  Not all of that would be the responsibility of the SWP and CVP, but the document does state "The Projects (SWP/CVP) would bear a significant portion of that responsibility since they are the largest, most junior diverters in the watershed..."

These new outflow regulations will have major impacts on this slide that has been at the heart of the MWD staff argument that WaterFix is a good investment.  

MWD staff's "Future without CA WaterFix," cuts Delta exports by 1 maf over "Existing Conditions."  This future scenario looks more likely now, and it would go a long way towards meeting the Board's proposed outflow requirement that would cut diversions by 2 maf.  On the other hand, it is pretty much impossible to see how the "Future with CA WaterFix" scenario could occur and meet the outflow requirement of the Board.  As mentioned above, the Board says "The Projects would bear a significant portion of that responsibility" but under this Future with CA WaterFix scenario, the Projects would increase diversions compared to Existing conditions and wouldn't be contributing anything.  

Thus, the new Sacramento/Delta outflow rules are likely to push the bar on the far right (water exports with the WaterFix) down, and thus will push the estimated water yield from the tunnels way down and the difference between these two bars should be much smaller.  I would argue that the EIR/EIS project yield of 0.2 maf looks like a better assumption than staff's 1.3 maf of water yield.  As the yield declines, the cost per acre foot rises rapidly and WaterFix becomes a worse investment for MWD.

The MWD board would be well advised to redirect the billions they would invest into WaterFix into alternative projects that will yield more water per dollar invested while furthering the state's goal to reduce reliance on the Delta.
Finally, I should mention the two changes in what MWD staff has provided to the board in the July 10 packet compared to the April 10 vote.  

First, the July 10 agenda does not include a single-tunnel option for the board.  Staff says this is no longer an option, pointing to a letter from a Department of Water Resources lawyer saying DWR is no longer considering a "staged" single-tunnel plan.  The MWD Board should not accept that flimsy  dismissal of the single-tunnel option.  DWR only said that because the MWD board voted to finance the 2nd tunnel on April 10.  

Should the MWD board rationally choose not to fund both tunnels now, a one-tunnel plan will be back in consideration.  For precedent, look at what Santa Clara Valley Water District did last fall - they voted to support a single-tunnel concept when there was no single-tunnel proposal - and suddenly that became the plan.  The real concern is the time pressure created by the end of Governor Brown's term.  It is probably true that the twin tunnel proposal will die if it is not approved before the end of his term, but I don't think the same can be said of the urban, single-tunnel option.  As I recall, Gavin Newsom has said that he supports the concept.  While I think no tunnel is the right answer for California, I would agree that single-tunnel is a better and less risky option for MWD than this "unsubscribed capacity" two-tunnel strategy. 

The second important change to the July 10 packet was a new estimate of the additional water supply MWD could get from the 3,000 cfs unsubcribed capacity if CVP did not lease it from them, 150,000 af.  Staff had not been clear about this before, and it seemed like some board members thought they would get 433,000 af in additional water supply if CVP didn't lease capacity (the same benefit estimated for CVP), but this extra capacity would deliver about 1/3 the water supply benefit to MWD than it would deliver to CVP.   Financing the unsubscribed capacity would increase MWD's cost for the tunnels by more than 100%, while increasing their water supply benefit by less than 20% at best (perhaps nothing at all given the state board's newly announced plan for increased outflow).

MWD staff's plan to fund 65% of the twin-tunnels is a bad deal that keeps getting worse for MWD ratepayers.  Fortunately, MWD board members have another opportunity to vote and they have plenty of good reasons to change course.

Saturday, June 30, 2018

New WaterFix Financial Plan Is Extremely Risky. Will MWD Board Reconsider Their Vote on July 10?

On April 10, Metropolitan Water District (MWD) approved, with little analysis, a hastily conceived plan that greatly increases their "Waterfix" commitment from $4.3 billion to a blank check for 65% of the project (currently estimated at $10.8 billion).  Most of the additional cost is from MWD committing to finance the project's "unsubscribed capacity," which is defined as 1/3 of the $17+ billion project.  The "unsubscribed capacity" exists because the agricultural serving Central Valley Project made a rational decision not to finance their share of the $17+ billion Waterfix tunnels, and MWD's last minute reversal is a desperate attempt to fill this financial hole and get it approved before the full risks of the plan can be understood.  While this vote commits MWD to 65%, they are also negotiating exchanges with State Water Project agricultural contractors for portions of the other 35%, so it seems probable that MWD's final share will be 75% or more.
Due to likely Brown Act violations, MWD will be revoting on the additional financing on July 10.  In a letter denying the Brown Act violation while announcing the revote, MWD argues that there was no violation because the vote must be viewed in light of the "robust discussion" around the tunnels in over 10 years of planning.  I agree with that, this last minute change to the financial plan must be viewed in light of 10 years of staff describing a completely different financial scenario; ten years of staff wrongly stating that farmers will pay for the majority of the project; ten years of staff insisting MWD's share is only 26%; ten years of staff saying there will be no farm subsidies; and ten years of staff dismissing analysis (by me and others) that correctly predicted that farmers would and could not pay their share and that MWD ratepayers or taxpayers would subsidize the project. 

In fact, most of the agenda packet for the meeting in which MWD commits an additional $6.5+ billion to the project are white papers and analysis that do not even contemplate that MWD would pay more than $4.3 billion, or how non-participation of the CVP could affect project operation.  This new deal hasn't received a fraction of the previous analysis, and it is clear that many are uninformed and confused about what this change means.  MWD staff say that CVP agricultural contractors are expected to pay them back in the future by renting the tunnel capacity from them, a plan with remarkable parallels President Trump's plan to have Mexico reimburse U.S. taxpayers for building his border wall if Congress approves up front financing

MWD board members still do not have key information they need to consider before making risky, multi-billion dollar commitment from their ratepayers.  This information includes:
  • The "Master Agreement" with DWR that describes the management of the "unsubscribed capacity."  The board wasn't even provided a draft agreement, just a powerpoint slide that lists what staff hopes will be in this critical agreement.
  • An analysis of whether the unsubscribed capacity arrangement in the master agreement will stand up to legal challenge, does not infringe on others water rights, and complies with the California constitution (notably Propositions 218 and 26).
  • An independent benefit-cost and financial analysis of the additional "unsubscribed capacity" investment, including a robust analysis of risks and unintended consequences. 
  • Since staff argue they will be repaid by CVP farmers, they should provide some evidence that this expectation is reasonable.  If they couldn't get a formal agreement, it seems there should be a minimal expectation of a letter of support from CVP that signals their intent to use and pay for this capacity.  In addition, how about a serious independent analysis that shows why it would be in CVP farmers economic interest to pay these costs.
Last weekend, I finally watched the March 27 workshop meeting where staff reviewed the unsubscribed capacity deal.  As far as I can tell, this meeting is the only information on the unsubscribed capacity deal prior to the vote, and months later, is still the best information out there.  I found the meeting alarming.  MWD staff did not adequately convey the risk of the financing scheme to the board, and made a number of questionable and misleading statements throughout the meeting.  Some of the board members (those who voted No on April 10) asked good questions, but did not receive good answers from staff.

Below are some more specific comments on this financial plan after watching the March 27 workshop. 

This deal increases the already high risk that the tunnels will never provide the additional 1.3 million acre feet (maf) of water supply reliability claimed by MWD staff.     

The 1.3 maf of water supply benefits is the result of MWD staff using an alternative no-tunnel baseline than is used in the EIR/EIS and various regulatory permits for the tunnel.  In the WaterFix permit documents, the incremental water supply benefit is just 0.2 maf, not 1.3 maf, because the no-action baseline is different.  The difference between the MWD staff estimate of 1.3 maf, and the 0.2 maf in the EIR/EIS, is that the official permit project description includes new south Delta pumping restrictions as part of the WaterFix project, whereas the staff analysis puts these new south Delta pumping restrictions into the no-tunnel baseline (and thus takes them out of the WaterFix project).

When all the SWP and CVP contractors are participating equally, this baseline argument is kind of abstract and academic although it is critical to the assessment of the benefits, costs, and environmental impacts of the tunnels.  However, it is no longer an academic debate when the CVP is out and MWD is financing "unsubscribed capacity." When all entities are participating, the touted 1.3 maf water supply benefit are the 2 projects working together to "protect" water they are currently diverting from future reductions.  But when MWD staff is using this speculative no-tunnel baseline assumption to define the additional water supply benefits they will receive for the extra investment, the additional water supply is water that goes to the CVP under current regulations.  Thus, in this unsubscribed capacity scheme, MWD staff is using this speculative future baseline to argue that financing the full WaterFix will give them control of water supply that CVP currently diverts from the south Delta.  That is a very different argument, and MWD board members should be very, very skeptical of that it will actually work that way.

Surprisingly, MWD staff patted themselves on the back for being consistent with this 1.3 maf yield assumption since way back in the BDCP days.  Stubbornly maintaining the same wrong position even as the facts change is nothing to boast about.  It was a speculative assumption under BDCP, but MWD staff stuck with the 1.3 maf water yield estimate even though shifting from BDCP to WaterFix (and losing the BDCP's section 10 ESA permit) reduced the primary rationale for this assumption.  And now the non-participation of the CVP further reduces the justification for this optimistic water supply assumption, but MWD staff is sticking with it - just like they stuck with their claim farmers would pay.  Good luck wrestling that water away from the CVP if they don't pay for the tunnels (not to mention environmental needs).

Financing "unsubscribed capacity" substantially increases project risks.  Three of the projects' biggest risks to MWD are amplified by this deal.
  • Cost overruns.
  • Farmers don't pay.
  • Future environmental regulations restrict the north delta intakes.
These have been big risks for MWD all along, but they are magnified here because this deal makes them positively correlated.  For example, if the project has construction cost overruns like most megaprojects - it greatly increases the risk that farmers will choose not to pay MWD to use the "unsubscribed capacity" because the costs will be too high.  In contrast, in the framework staff described for 10 years, all participants would have been equally on the hook for cost overruns, but the vast majority of cost overrun risk falls on MWD now.  In light of this, the MWD board should request an independent and updated cost estimate rather than rely on an old outdated, cost estimate.

As mentioned above, when the tunnels shifted from the BDCP to the WaterFix, MWD lost section 10 ESA assurances against future regulations and thus accepted much greater risk that the north Delta intakes could be restricted in the future.  That risk further increases with farmers not participating (which is more likely with cost overruns), because there will be a powerful political constituency arguing to pin future environmental problems in the Delta on the tunnels instead of the south Delta pumps where they divert.  The biological opinions and other analysis of the tunnels to date suggests that it won't be hard for the CVP to get scientific support for stronger restrictions on the north Delta instead of the south.  

MWD staff said they cared about risk reduction and wrote this principal on their powerpoint slides, but the reality is that this financial deal increases financial risk even more than the increase in their cost share.    

Staff comments about exchange contractors, wildlife refuges, and CVP ability to access the tunnels don't sound right.

In the meeting, staff argued that the CVP will not have any access to the tunnels, even if it means exchange contractors and wildlife refuges would receive diminished water supply.  I am pretty sure there are some lawyers with differing opinions on that one.  My first thought was to wonder if staffs claims about the effects of non-participation in WaterFix on CVP is consistent with this recent settlement between Friant and DWR.  If I were a MWD board member, I would be asking for an independent legal opinion on these issues.  

MWD staff is wrong that this financing approach maintains consistency with the approved project.

Maintaining consistency with the project that has received some permits (and is still under consideration for others) was touted as a major advantage to MWD financing the full 2-tunnel, 3-intake project rather than scaling down to a single-tunnel, "phased" approach.  While this keeps the physical infrastructure the same as in the permits, I am told that implementing the proposed "master agreement" in the way MWD staff describes would create big changes in operations (including upstream reservoirs, the south Delta intakes, and the distribution of export water south of the Delta).  Thus, it will result in big changes to the environmental and water supply impacts of the project, and could easily add permitting delays that are comparable to the single-tunnel approach.

Staff is wrong that farmers will repay them, and that the farmers need them to finance the "unsubscribed capacity" because of cash flow.  

Staff is right that this is a better deal for CVP farmers, but it is not for the reasons they say.  CVP farmers benefit from MWD financing the "unsubscribed capacity" deal because it a) shifts the risk of cost overruns and other problems from them to MWD, b) gives them a decade or two to find ways to shift their cost share onto someone else, and c) allows them to pass on the deal all together if it isn't beneficial to them (which it will not be unless a subsidy materializes).

With the cash flow during construction argument, MWD staff is just making something up that sounds plausible, but it is less credible than a pitch from a used car salesmen.  Westlands and CVP contractors can do the same thing while financing their share themselves by capitalizing some or all of the interest on the bonds.  Goldman Sachs described these options in their presentation to Westlands using a cash flow argument, and it is a common argument/structure for infrastructure bonds.  MWD staff claims that they would be repaid by farmers for fronting the money, including all the accumulated interest, which is no different to the CVP than financing it directly with capitalized interest.

Of course, staff also mentioned that the Sustainable Groundwater Management Act (SGMA) will make this water more valuable to farmers in the future.  They are right about that one.  The primary substitute for surface water is pumping groundwater, so SGMA will reduce access to that substitute and will increase the value of water.  I have seen estimates that it could drive willingness to pay up to $500 or $600 per acre foot.  There are some limits to high how it can go, as there are still other alternatives to get water than paying for the tunnels.  Lower cost options could include lobbyists, lawyers and campaign contributions, and the most costly options are to let the land growing less profitable crops go fallow, or go buy a farm somewhere else.  Even those high-cost options are likely to be cheaper than spending billions on tunnels for meager water supply improvement.

MWD staff made a terrible comparison between MWD's investment in the unsubcribed capacity to a private investor in a private/public partnership.

This analogy begs the question of why aren't private investors financing the unsubscribed capacity instead of MWD?  Unlike private investors in a public-private partnership, water agency staff (and boards) are risking other people's money, not their own.  Private investors would never touch this deal, and neither should MWD.

MWD staff blames the Bureau of Reclamation, but this financial mess is their own fault.

These financial issues were entirely predictable, and in fact were predicted 6 years ago.  MWD staff acts like the Bureau of Reclamation surprised them with an unexpected change.  Really?  No one ever seriously believed exchange contractors and wildlife refuges would pay because they don't benefit, and the CVP contractor with the most potential gain, Westlands, have been in doubt since the beginning and had their planning costs subsidized. 

This mess of a financial plan is a direct result of the Department of Water Resources (in alignment with MWD staff and state water contractors) to ignore their own guidelines about about feasibility studies and cost-benefit analysis, and their push back against every attempt to require an independent analysis of financial feasibility, and economic benefits and costs.  I can recall sitting in multiple Assembly hearings in recent years while MWD staff argued against bills that would have required the state to follow its own guidelines on financial feasibility and benefit-cost studies.  Rather than fighting against independent financial analysis along the way, MWD staff should have supported proper financial and economic analysis.  Then they could have been developing and analyzing the feasibility of alternative financing approaches years ago, not coming to their board with half-baked financial schemes at the last minute.

I am sure others have many more questions to add to mine.  Hopefully, MWD staff will take advantage of the additional time to fill-in the numerous critical information voids and provide their board with adequate information and analysis to make a commitment of this magnitude.  I am not expecting that, but maybe some MWD board members will use the opportunity to get more information and reconsider their vote.

Friday, June 15, 2018

New Data Shows California Farm Employment Decreased Slightly in 2017, First Decline Since 2009

New data from the Quarterly Census of Employment and Wages (QCEW, shown below) shows total farm employment in California declined 0.5% between 2017 and 2016.  This breaks a streak of seven straight annual increases, which to the surprise of many, persisted through the worst drought in California's modern history.  Interestingly, the decline was entirely due to a sharp 4% year-year drop in the months of January and February 2017, farm employment was unchanged over the rest of the year.  Since these two negative months correspond to President Trump's inauguration, and are also in the low season, increased anxiety surrounding immigration policy may have had an impact.

Average wages paid increased 3.1%, enough to keep pace with inflation, but about half the percentage increase seen in 2015 and 2016 and the smallest gain since 2011.  An increase in the minimum wage from $8 to $10 per hour contributed to higher 2015 and 2016 wage increases, as 2017 brought a smaller 50 cent increase to the minimum wage that only applied to employers with at least 26 employees. 

Farmers are having an increasingly difficult time getting all the workers they demand as immigration has decreased and unemployment in California's farming regions have dropped to record lows.  While farm worker wages have increased somewhat faster than overall average wages, it is still the lowest paying industry in California by far, and farm worker wages have not increased as much as one might expect in response to the combination of reported shortages and the rising minimum wages.  Nevertheless, the farm labor situation is causing more change to California agriculture than water scarcity, as farmers across the state are adjusting crop choices, and exploring and implementing new labor saving technology.

Changing policies are likely to accelerate the pace of this in the coming years.  Between 2019 and 2022, California's minimum wage will rise from $12 to $15 per hour.  Over the same period, the state will phase in new overtime rules that will bring agriculture into alignment with rules governing other industries.  In addition, these increased labor costs will hit at a time that the new federal tax law increases incentives for business capital investment.

Thus, big changes are coming to agriculture labor markets and this data will be very interesting to track over the next 5 years.  While it will be a challenging time for farmers, I am optimistic that the Valley economy will benefit in the long-run from the transition of the industry to a more capital and technology intensive production with higher wages, even if it ultimately means fewer jobs.

Year Crop farm Anim Farm Ag Services Total % change
2007            172,222              29,955            180,454              382,631
2008            174,697              30,283            183,405              388,385 1.5%
2009            170,041              29,157            171,453              370,651 -4.6%
2010            170,068              28,299            181,386              379,753 2.5%
2011            170,333              29,140            186,546              386,019 1.7%
2012            171,501              28,987            195,225              395,713 2.5%
2013            174,776              28,266            205,552              408,594 3.3%
2014            175,127              28,140            209,131              412,398 0.9%
2015            176,537              28,496            213,178              418,211 1.4%
2016            172,847              28,476            219,839              421,162 0.7%
2017            169,252              28,672            221,155              419,079 -0.5%
Total Wages (in thousands)
Year Crop farm Anim Farm Ag Services Total % change
2007  $     4,416,340  $        848,165  $     3,680,430  $       8,944,935
2008  $     4,567,919  $        898,979  $     3,841,685  $       9,308,583 4.1%
2009  $     4,452,149  $        877,571  $     3,661,821  $       8,991,541 -3.4%
2010  $     4,526,888  $        860,390  $     3,973,411  $       9,360,689 4.1%
2011  $     4,667,911  $        905,600  $     4,237,943  $       9,811,454 4.8%
2012  $     4,931,875  $        913,074  $     4,634,998  $     10,479,947 6.8%
2013  $     5,274,135  $        913,979  $     5,087,808  $     11,275,922 7.6%
2014  $     5,483,877  $        950,215  $     5,359,878  $     11,793,970 4.6%
2015  $     5,734,489  $     1,021,973  $     5,856,656  $     12,613,118 6.9%
2016  $     5,947,906  $     1,064,181  $     6,541,821  $     13,553,908 7.5%
2017  $     6,024,487  $     1,119,909  $     6,757,423  $     13,901,819 2.6%
Average Wage
Year Crop farm Anim Farm Ag Services Total % change Min wage
2007  $          25,643  $          28,315  $          20,395  $            23,377 $7.50
2008  $          26,148  $          29,686  $          20,946  $            23,967 2.5% $8.00
2009  $          26,183  $          30,098  $          21,358  $            24,259 1.2% $8.00
2010  $          26,618  $          30,404  $          21,906  $            24,649 1.6% $8.00
2011  $          27,405  $          31,078  $          22,718  $            25,417 3.1% $8.00
2012  $          28,757  $          31,499  $          23,742  $            26,484 4.2% $8.00
2013  $          30,177  $          32,335  $          24,752  $            27,597 4.2% $8.00
2014  $          31,314  $          33,767  $          25,629  $            28,599 3.6% $8.50 (July 1 increase to $9)
2015  $          32,483  $          35,864  $          27,473  $            30,160 5.5% $9.00
2016  $          34,411  $          37,371  $          29,757  $            32,182 6.7% $10.00
2017  $          35,595  $          39,059  $          30,555  $            33,172 3.1% $10.50 (>25 employees), $10 (<26 font="">

Notes:  Employment is the average of monthly payroll employment over the year, and the average wage is just the total wages paid over the course of the year divided by the average number of jobs.  Data on hours worked or the hourly wage are not available from the QCEW.  The QCEW is a census of all employer tax filings and is considered the most reliable data on payroll jobs and wages.  The data includes NAICS codes 111 (crop farms), 112 (animal farms), and 115 (support services which includes a small amount of non-farm jobs but is dominated by farm labor contractors).  

Monday, June 11, 2018

Another small step towards a creative downtown Stockton

Mike Fitzgerald's weekend column profiled a group of young San Francisco transplants starting up a "maker space" in downtown Stockton.   While this is a slow developing movement, I still think encouraging more of this is one of the best economic development strategy for Stockton.   Nearly two years ago, I wrote this in another post,
Everybody is so impressed with Silicon Valley that far-fetched hopes for the tech industry often dominate economic development talk.  But the best assets of Stockton, proximity to Bay Area markets with relatively low real estate costs, are not that important to tech industries who aren't sensitive to rents and sell to a global market.  The tech industry has moved up the peninsula to even more expensive San Francisco.  Much of the attraction is the art and cultural attractions of the City, and there is much concern in SF that the tech workers are damaging the City's cultural fabric as they drive rents into the stratosphere.

I have long thought Stockton should focus its economic development on artists (broadly defined to include craftspeople, musicians, etc.), since they are more likely to be attracted to what the city has to offer.  They are sensitive to rents, and value access to the Bay Area market but do not necessarily have to live and work there every day.  Stockton's history, diversity, and urban environment can also be a plus.

Tuesday, May 15, 2018

Seattle Taxes Amazon As Other Cities Throw Subsidies At the Company

The irony.  Almost every city in the country has offered generous tax incentives to Amazon to attract their second headquarters, while the city council of the city with the actual headquarters has targeted them for a new tax on each employee as a response to rising rents and homelessness. 

Supporters of a head tax cheer as the Seattle City Council prepares to vote Monday. Amazon became a kind of symbol during weeks of discussion on the head tax. Some people said big businesses ought to pay a new tax to help address the homelessness crisis, while others worried about an anti-business message. (Bettina Hansen/The Seattle Times)

Is this a policy that could spread to California?  California cities, including Sacramento and LA, were among those offering Amazon subsidies while experiencing homelessness problems of their own.

More than the revenue, the measure seems to also be about trying to get Amazon and other fast growing companies to stop growing and attracting new high-paid residents.  It may work.  Seattle is the #1 destination for people leaving the Bay Area, but may not be for long.

Corporations like Amazon and Starbucks reacted angrily, and accused the City of financial mismanagement.  Indeed, it seems those soaring rents and property values ought to be filling the cities coffers with tax revenues.  This article suggests that Seattle City revenue has grown rapidly which raises questions about how much the revenue is needed.

I also wonder how this might affect Amazon's HQ2 decision.  It might make them more hesitant to go to cities with high rents, progressive politics, that have the potential to generate a Seattle like backlash in the future.  That would seem to make LA, Boston, Denver, DC less attractive while potentially boosting places like Atlanta, Austin, Pittsburgh, and Columbus.

Update 6/15:  Seattle repealed the tax this week, but I suspect it could still have an impact in how Amazon looks at cities for HQ2.  I wouldn't be surprised if it makes them consider splitting up the project rather than create more Seattle situations.

Thursday, April 26, 2018

Stockton Has Both the Longest and Shortest Commutes in the U.S.

The Stockton-Lodi area has a very interesting economy - there are many extremes and averages can be deceptive.  This is well illustrated by Stockton appearing at the top of the list in two recent studies: one that measured the share of the population that are super-commuters, and the other measured shortest commutes.  In other words, if you are a worker in the Stockton-Lodi area, your commute is likely to be either extremely short or extremely long.

Here are the stories/studies:

First, from this weeks San Jose Mercury News,
SJM-L COMMUTE-0425-90-01

Second, this slightly older Marketwatch story describing a Brooking Institution report that looked at commute length for people who live and work in the same metro area.
The longest commute is in sprawling Atlanta, followed closely behind by Dallas and Houston. The shortest commute is in the Stockton-Lodi, Calif., metro area.  
Metro Typical commute in miles
Stockton, CA 4.7
New Haven, CT 5
Scranton, PA 5.2
Oxnard, CA 5.3
Bridgeport, CT 5.4
Provo, UT 5.5
Bakersfield, CA 5.6
Fresno, CA 5.6
Spokane, WA 5.6
Ogden, UT 5.7

The top 10 are listed above, notice that other Central Valley Metros are here too.  And here is the link to the original Brookings study

This is a good example of how averages can be deceiving.  It is easy to see how a company or location consultant screening areas might use average commute time data and think that traffic and commuting is a terrible strike against it.  However, a closer look reveals that employee commutes are actually very short in Stockton for employers if they are a good fit for the regional workforce.

The relatively short local commutes of Central Valley metros in this ranking of local job proximity is interesting too.  With the exception of Sacramento, the large cities in the Central Valley (Stockton, Fresno, Bakersfield) are not characterized by sprawling suburbs full of workers commuting to an urban core of office jobs.  While these cities certainly have plenty of suburban, sprawl type housing in the city limits, often the city boundaries end abruptly into farmland rather than another suburb, followed by another suburb.      

Monday, April 9, 2018

Will the Metropolitan Water District Board Give Their Staff a Blank Check for WaterFix? Comparing language in MWD resolutions from October 2017 and April 2018

Last fall, when the Metropolitan Water District board voted to approve their share of WaterFix, the authorization of the General Manager was strictly limited to $4.3 billion (calculated as 26% of total estimated cost, but the limit was on the amount).

Tomorrow, the resolution before Board members does not limit the amount, but approves the General Manager to pay 64.6% of total project costs and grants the General Manager discretion in how the percentage is calculated.  While the staff report estimates this amount as "up to $10.8 billion," the actual resolution varies substantially from previous resolutions in that it does not include a specific dollar amount or any language to limit the total amount.  

This seems like a very substantial change to language that increases the financial obligation and risk to Metropolitan's ratepayers by much more than the difference between $10.8 billion and $4.3 billion.  I have pasted the relevant resolution language below.  Read it for yourself.

October 10, 2017 resolution: 

"2. Authorization of General Manager. The Board hereby authorizes the General Manager of the District, and any of the designees of the General Manager of the District, to do any and all things necessary or convenient in the best interests of the District to effect any financing of the California WaterFix through the Financing JPA (referred to herein as a “District Participation Action”) consistent with the CWF Project Arrangements, and to enter into any and all agreements and documents that the General Manager or his designee determines, in his or her sole discretion, to be necessary or convenient in the best interests of the District to carry out any District Participation Action, and to execute all papers, documents, certificates, agreements or other instruments that may be required in order to carry out any District Participation Action or to evidence said authority and its exercise; provided, however, that the District shall not make financial commitments to the California WaterFix in excess of $4.3 billion in 2017 dollars, which amounts to 25.9% of the estimated $16.7 billion in total capital costs of the California WaterFix. The term of bonds issued for the project shall not exceed 40 years and the total interest cost on debt issued will not exceed 8%. In implementing these actions, the General Manager of the District shall be authorized to use such reasonable assumptions, methods, approaches and calculations that it believes, in good faith, to be consistent with the authorizations herein and necessary to the implementation of the matters provided for in this Resolution." 

April 10, 2018 resolution:

"2. Authorization of General Manager. The Board hereby authorizes the General Manager of the District, and any of the designees of the General Manager of the District, to do any and all things necessary or convenient in the best interests of the District to effect any Unsubscribed Capacity Arrangements, and to negotiate, execute and deliver any and all agreements and documents that the General Manager or his designee determines, in his or her sole discretion, to be necessary or convenient in the best interests of the District to carry out any Unsubscribed Capacity Arrangement, and to execute all papers, documents, certificates, agreements or other instruments that may be required in order to carry out any Unsubscribed Capacity Arrangement or to evidence said authority and its exercise. 

3. Limitation of Authorization. The District shall not enter into any Unsubscribed Capacity Arrangement under Section 1 or 2 of this Resolution if, after giving effect to such Unsubscribed Capacity Arrangement, the District’s funding of such Unsubscribed Capacity Arrangement, together with the District’s estimated costs in its capacity as a State Water Project contractor, would commit the District to pay for more than 64.6% of the estimated costs of California WaterFix; provided, however, that the General Manager shall calculate the total amount of estimated costs of California WaterFix and the District's responsibility to pay for costs of California WaterFix based on such reasonable assumptions and methods as the General Manager shall determine in his or her reasonable discretion and judgment." 

Highlight and Bold added 4/10.
Links to original documents:
For October 10, 2017

For April 10, 2018

Wednesday, March 7, 2018

Revised Data Reveal Explosive Growth of E-commerce in the Stockton Area: Transportation and Warehousing Jobs Now Exceed Retail Jobs

The annual benchmark revisions of local area employment data was released today (benchmarking is a once a year process to sync the monthly survey data with complete tax filings data).  As I expected, there was a large positive revision to Stockton area growth that now more accurately captures the full growth of the logistics industry.

Specifically, the Stockton area year over year job growth is now reported at a sizzling 4.8% annual rate, rather than the underestimated 1.6% in last month's release of preliminary data.  The number of payroll jobs in the Stockton area for December 2017 is 7,800 more than previously reported (an increase from 232,400 to 240,200).  Of those 7,800 newly reported jobs, a full 6,000 of them are in the transportation and warehousing sector.  Wow!

Perhaps the most amazing tidbit in this data is that we believe that the Stockton is the first metro area in California where the number of transportation and warehousing jobs exceeds the number of retail jobs.  Is this a harbinger of the future for other areas?  [We haven't checked everyplace, but there are 3 retail jobs for every trans/warehousing job statewide, and even 1.5 retail jobs for every trans/warehouse job in the Inland Empire which is the other area in California seeing explosive fulfillment center job growth.]

Obviously, this change doesn't mean that Stockton residents are the biggest e-commerce shoppers in the country - these jobs are primarily serving the Bay area.  It is a sign about how the Northern California Mega-region is increasingly interconnected. 

If this shift to the e-commerce economy makes you a bit uneasy, you might want to read the previous post about a study from the Progressive Policy Institute.  It is disruptive change for sure, but the economic effects may be different than you think.

Tuesday, March 6, 2018

Fulfillment Centers and Jobs: Is Amazon replacing paid retail hours or unpaid household shopping hours?

Over the past year, I would estimate the most common press/public question we have received in the Center for Business and Policy Research is about the impact of Amazon and other fulfillment centers on employment and income.  Is the growth of this industry just destroying and replacing traditional jobs in shopping center, or do they provide a net gain to employment?

I recently heard Michael Mandel of the Progressive Policy Institute speak on this topic at the National Association of Business Economists meeting in DC.  His presentation and the full report are accessible to non-economists, and provide an interesting, and often overlooked, perspective on the issue.  While much of the data analysis in the report is oversimplified, I still found it insightful and believe the general conclusions are likely accurate.  It is an effective push back against the doom narrative that surrounds much public discussion around robots and automation.

Mandel compares e-commerce to a previous retail revolution, the rise of the big box store.  He finds that the rise of lower cost big box stores was truly negative for retail workers, and that at least some of the efficiency gains of big box stores was to shift hours from paid retail workers to unpaid household work (think of people driving farther to shop at a store with lower service, but lower prices.)

In contrast, he notes that e-commerce is substituting for household hours spent shopping and running errands.  Thus, while fulfillment centers are having some negative effect on paid retail jobs, they are also creating new jobs by converting unpaid household shopping time to paid shopping time fulfilling and delivering orders directly to households.  He documents a significant decrease in household shopping hours that parallels the rise in e-commerce, and estimates that unpaid household hours of work still exceed paid hours in America's goods distribution system.  Thus, there is still a lot of potential for growth here.

He also notes fulfillment center jobs pay somewhat higher wages than big box retail, and that they only require a high-school education but utilize "a mix of cognitive and physical skills not dissimilar to industrial workers." 

In economic development conversations around the North San Joaquin Valley, I have often wondered whether these new distribution center jobs could be part of a skill building ladder for their employees - and whether experienced fulfillment center "graduates" could be an attractive workforce employers with even higher paying jobs.  There is also a lot of talk about a new wave of innovation, involving technology like 3-D printers, that could lead to some goods production or customization attached to these fulfillment centers.

I understand why there is anxiety about the robots in these automated distribution centers and what they mean for the future of work.  It is disruptive change, but I see the potential for more positives than negatives.  Indeed, Mandel said he thinks the biggest economic losers will be owners of shopping centers and big box stores.  Converting all that space and parking lots to other uses (like housing) could help alleviate some other problems we have, and create another batch of new jobs.

If you are looking for a readable and refreshing take on e-commerce, Mandel's report is well worth reviewing. 

Monday, March 5, 2018

The Wall and The Tunnels: Multibillion dollar boondoggles share bait and switch financial plans and more

Donald Trump’s biggest campaign promise was building a $20+ billion wall along the Mexican border.  The financial plan:  “Mexico will pay!”

For a decade, Metropolitan Water District has been campaigning for the $16+ billion Delta tunnels.  The financial plan:  “Farmers will pay!”   Well, that hasn’t exactly been their line.  Instead, the promise has been, “The cost is the same as a latte a month” along with promises of “no subsidies for farmers.” 

There have been many dubious assumptions behind Met’s calculation that it will “only” cost the average southern California household a few dollars per month, but the biggest whopper has always been that Met’s ratepayers would only covering 25% of the bill – which meant Central Valley farmers would shoulder the vast majority of the costs.

Despite the fact that most knowledgeable people knew both Trump and Met’s financial claims were a joke, they stood by these myths when they were in campaign mode trying to build political support and a sense of inevitability behind their mega-projects.  But in recent months, both of them have faced the reality of switching from a political campaign to actually getting the billions of dollars needed to fund construction of their pet projects.

Trump has spent the past several month’s trying to get Congress to appropriate over $20+ billion for the wall, even threatening government shutdowns and a DACA solution in his effort to get taxpayers to pay.  His new financial promise:  “Congress will pay, but Mexico will reimburse us.” 

As first reported by the Sacramento Bee's Ryan Sabalow, Metropolitan is now trying to rush its board into voting to pay for the farmers share of the tunnels.  Met's new financial scheme: “Our ratepayers will pay, but the farmers will reimburse them.”

Congress has not agreed to pay for Trump’s wall.  Likewise, Metropolitan’s board should not agree to finance the Governor’s tunnels.  The Met board has been misled about financing the tunnels for a decade, and I would advise board members not to believe this latest plan either:  The farmers aren’t going to pay you back, AND you aren’t going to get a share of their water supply if they don’t. 

All the way back in 2012, I predicted in an economic analysis of the tunnels that they were financially infeasible unless urban ratepayers and/or taxpayers covered 90% of the cost.  I think that prediction is looking pretty good today.  It is certainly more accurate than the consultant and staff presentations the MWD board has been listening to for 10 years.

The parallels between the Tunnels and the Wall go beyond this synchronized pivot from “other people will pay” to “you will pay, but the other people will reimburse you.”  Both of these multi-billion dollar concrete mega-projects are not very effective at addressing the issue they are trying to solve. Furthermore, both of these projects are incredibly divisive concrete symbols of power that are truly offensive to large segments of the population.

For example, Congressman LuisGuiterrez famously tweeted this about the Wall, “It would be far cheaper to erect a 50-foot concrete statue of a middle finger and point it towards Latin America. Both a wall and the statue would be equally offensive and equally ineffective…”

Many Delta region residents and environmentalists feel similarly about the Delta tunnels.  

And Metropolitan’s new go it alone financing plan makes the tunnels even more divisive than ever, because it will open up a new hostile front in California’s water wars between the urban serving State Water Project and the agricultural serving Central Valley Project.  MWD’s Jeff Kightlinger acknowledged this when answering concerned questions from his board members:

"it puts the two projects in competition instead of in partnership and how to sync their operations. Now you would have CVP people saying we need to maximize south Delta, we need to politicize that issue as much as we can, and that’s not appropriate because we’re the one who made the investment to do the more environmentally friendly investment. How we would work that with the state and federal project at odds with each other, trying to work these out in the state and federal legislatures is challenging..."
This is an accurate assessment of the additional conflict, except that many disagree with him that the tunnels are an environmentally friendly investment.   

Metropolitan’s new financial plan would make a bad project even worse.  Will Met’s board be able to resist the political pressure to take a rushed vote on this ill-advised strategy?  Sounds like we will find out next month.

Tuesday, January 16, 2018

One Tunnel Confusion: Whether its downsizing or phasing, one tunnel won't fix the WaterFix.

In recent days, there have been multiple news reports that the WaterFix is shifting to a less costly one-tunnel, two-intake project as opposed to the current two-tunnel, three-intake proposal.  But the Brown administration issued a statement to clarify that WaterFix is still the same two-tunnel project, but construction could occur in phases because of funding issues.  Is this phasing language important, or is it a distinction without a difference?

When thinking of the potential impacts of the change, it is important to recognize that the WaterFix is not just a proposal for new conveyance facilities, it is a proposal for new operating rules that add significant new restrictions on the operation of existing pumps in the south Delta.  

Since a phased approach is the same WaterFix project according to the state, all the WaterFix operating restrictions on the south Delta pumps would presumably still apply, even though the ability to divert from the north Delta would be lower during the single-tunnel phase.  Those rules are part of the project, and I doubt they could be adjusted without creating a major setback in the permitting process.  It is not clear that lighter pumping restrictions could be justified anyway because one tunnel could be just as bad for fish.  

I have been told two reasons why one tunnel could be as harmful to fish as two tunnels even if it diverts less water from the Sacramento River.  First, the smaller tunnel capacity would mainly reduce exports during high-flow periods when diversions are least damaging to the environment.  Second, when lower amounts are diverted during lower-flow periods, fewer intakes would cause more concentrated, higher-velocity diversion rather than being spread over 3 intakes and 5-6 miles of river.  So the main effect of one tunnel is to cut in half the capacity to divert water during high-flows, which has been touted as the main benefit of the tunnels.

So how much less water would be exported compared to two-tunnels?  A scenario like this was modeled for BDCP "Alternatives to Take" analysis in 2013, and it found that compared to the proposed 9000 cfs twin tunnels; Delta exports would be 218,000 af lower with 6000 cfs conveyance and 517,000 af lower with 3000 cfs conveyance.  This suggests a 4500 cfs one-tunnel WaterFix would reduce water exports in an average year by about 400,000 af compared to the twin-tunnel proposal.  

Considering that the current 9000 cfs WaterFix only increases water exports by 200,000 af compared to No Action, that means one-tunnel WaterFix export about 200,000 af less than the No Action Alternative.  The other benefits to water agencies, water quality improvements and seismic protection, would also be lower with one tunnel.   

Finally, CVP contractors aren't participating in the WaterFix, and have been assured their south Delta diversions will not be harmed by WaterFix.  That could be hard to do in practice since the WaterFix permits depend on constraints to south Delta pumping, but it seems that the SWP would probably bear all of the costs of pumping constraints that were part of the WaterFix proposal.  If endangered and threatened Delta fish continue to do poorly, CVP contractors will be arguing that this is due to WaterFix - not their south Delta diversion - and they will find plenty in the WaterFix EIR to support their position.  The WaterFix could be blamed in the same way largemouth bass and water treatment plants are today.

Considering the reduction in benefits from a phased WaterFix and the prospect of new conflicts and more uncertainty, some water agencies that support WaterFix might want to reconsider their funding commitments under this phased approach.

As Michael Hiltzik with the LA Times wrote this fall, this is likely just another stumble as WaterFix "staggers to its deathbed." 

Monday, December 4, 2017

Update 3: Final Senate Tax Plan Eliminates Most of My Tax Increase, But at What Cost?

I have been chronicling how the various iterations of Republican tax "cuts" would increase my family's tax bill in order to illustrate its effect on an upper middle class, homeowner family in California.  Summarizing the results to date:

Original Trump "Framework": Over $4,000 tax increase
House Tax Plan: About a $3,000 increase
Senate Tax Plan (original  proposal): $2,100 increase next year, $3,250 increase in future years
Final Senate Tax Plan:  Little to No Change in my taxes.

The final tax plan included three changes to lower my taxes that mostly offset the tax increases that came from eliminating $30,000 worth of exemptions for dependents and deductions for state/local taxes.  These three changes to the final bill had a combined effect of cutting our estimated tax bill by about $3,000, eliminating the tax increase in the draft Senate Plan:

  • Marginal tax rates were further lowered (down to 24% in last version).
  • Child tax credit increased to $2,000, and $500 for non-child dependants.
  • Changes to pass through business deduction looks like it would now apply to a small portion of my wife and I's income that is reported on Schedule C, not W-2 wages. 
Of course, these changes had to be "paid for" by a number of provisions that increase the indirect effects on us such as:
  • Repealing individual mandate under Obamacare could destabilize health insurance markets and raise rates.  "Fixing it" outside of the tax bill as some Republicans have promised will cost significant money, further increasing the federal debt even if it stabilizes insurance.
  • Making individual taxes expire in less than 10 years.  Republicans promise that future congress won't allow these to expire.  Of course, that future "fix" will also further increase the federal debt.
  • Keeping the AMT (alternative minimum tax) at higher income thresholds.
Who knows what will come out of the Senate/House conference, but it will probably look more like the Senate plan since the vote margins are much smaller there.  If the final bill looks like the recently passed Senate bill, the bottom line effect on my family is this:

The direct effect on our tax bill appears to be minimal.

However, the indirect effects look negative.  These include:
  • an increase to the national debt that could lead to higher interest rates or larger tax increases in the future (or federal spending cuts).  
  • a decrease in home values (predicted by some to be a 10% decrease in our region), that might be partially offset by an increase in stock values.
  • negative effects on higher education that could affect me as an employee of this sector and parent of current and future college students
  • potential indirect impacts from increasing inequality, health insurance disruption, and other areas.
Putting aside my personal situation, as an economist, I do not support this bill for the reasons cited by most mainstream economists.  While there is a case to be made for some revenue neutral tax reform (i.e. cutting the 35% corporate rate, paid for by limiting deductions and broadening the corporate tax base), there is no case for deficit increasing tax cuts that further income inequality given current circumstances which include a) unemployment is nearly 4%, b) inequality is very high and rising, c) the economy is at/near potential, and d) the U.S. still has large budget deficit and record debt while facing very large increases in entitlement spending in the near future as the population ages. 

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.  (revised 11/22): I deleted a postscript note on taxability of tuition benefits as I received additional information about this item in the House tax bill.  It appears my previous interpretation was incorrect.