Wednesday, June 25, 2014

The Fictional Scenario Behind BDCP Jobs Claims

The LA Times and now some other sources have quoted me criticizing the BDCP's claim of a million jobs protected by building the tunnels, because it is based on a "fictional scenario."  These press reports do not explain why I said it is a fictional scenario, so I will do it here.

The jobs claims from BDCP are divided into 2 parts, as shown in this BDCP infographic.

The first part are those created by the direct spending on implementing the BDCP (building the tunnels and habitat).  This part of the analysis is well-done and estimates 155,090 years of employment, primarily from construction.

The fictional scenario is the second part: the claim of nearly 1 million jobs (years of employment) from water supply reliability.  The calculation depends on 3 far-fetched assumptions, all of which must be true to generate the level of water shortages that drive this kind of job impact.
  1. Water agencies don't invest in any new alternative water supplies for the next 60 years beyond what is under construction today, and there is virtually no increase in active conservation beyond current levels.  The Brattle Group says alternatives are speculative.  I guess it is speculative to assume that water agencies would do anything crazy like actually follow their own board-approved investment plans!  Metropolitan's own long-range plan specifically lays out what they would do over decades to ensure no water shortages even if there is no Delta solution and environmental regulations cut water supplies further.  It only takes this one ridiculous assumption to make it a fictional water shortage scenario, but wait there's more.
  2. Water demand in Southern California urban areas grows by 20% over the next few decades, even though there has been no growth in demand for the past 20 years.  This projection uses outdated and inflated population growth forecasts instead of following California law and using the Department of Finance population forecast as is required for state level planning activities.  Population growth is expected to be slower and development more dense in the future than it has been in the past 20 years of flat demand.  These types of water demand growth forecasts have been made by the water industry for decades to rationalize big projects and they have always been wrong.  This one is no different.
  3. Increased environmental regulation reduces Delta water exports by another 25%, as soon as 2025.  I guess they think the Environmental Water Caucus or Restore the Delta will be running the State Water Project control room in a decade.  Of course, the shortage wouldn't happen even if the state implemented these advocates' "Responsible Exports Plan", because their plan calls for large investments in alternative water supplies and conservation with the money not spent on BDCP (see assumptions 1&2 above).  Although I increasingly think this "Responsbile Exports Plan" is the best plan on the table, it is wildly speculative to assume that is the current direction of policy.  The current, much less protective levels of regulation are under attack in Congress and the courts, often by the same interests promoting the BDCP.     
Finally, I will note that the good part of the analysis that estimates 155,090 jobs (years of employment) is not very impressive given the cost.  If you divide by the $25 billion cost of BDCP, that amounts to only 6.2 jobs per $1 million of public spending.  Anyone familiar with employment multipliers should recognize that is an incredibly low total of employment for that level of spending.  The bottom line is that spending billions on imported tunneling machines and converting farmland to marsh just doesn't produce that much job bang for the buck.

Monday, June 23, 2014

BDCP Cost and Yield Deception

Last week, BDCP released what it describes as "cost and yield information,"  although I didn't see any new information in the glossy newsletter summary with the pretty bird. The newsletter makes 2 main claims: 1) BDCP provides reliable water for $5 per month, and 2) BDCP is cheaper than the alternatives.  Both of these claims are deceptive and are based on invalid comparisons and inaccurate assumptions.

I'll start with the second claim, BDCP is cheaper than alternative water supplies, which is illustrated in the BDCP glossy with this graphic.


I see six major problems with these comparisons.
  1. Subsidized BDCP costs are compared to unsubsidized alternative costs.  However, the proposed water bond subsidizes both BDCP and these alternatives.  According to BDCP, water agencies would pay 68% of BDCP's estimated $25 billion cost, and most of the rest would be paid by state water bonds.  While the agencies would pay all the cost of the Delta tunnels, the public subsidy of BDCP includes things essential to securing an endangered species "take permit" for the Delta tunnels, including billions for habitat construction projects and purchasing water from upstream sources to augment Delta freshwater in-flows which would be greatly reduced by the tunnels.  My understanding is that the current water bond proposal has more public funding for these alternative water supplies like recycling and groundwater cleanup than BDCP projects.  Thus, if the costs of BDCP to water agencies are displayed assuming water bond subsidies, then the alternative costs to water agencies should also reflect subsidies that would result from the same water bond(s).
  2. BDCP costs are reported as the change to the average cost of a large system with existing projects (i.e. State Water Project) whereas alternative costs are reported at the project level.  A consistent comparison to the alternatives requires BDCP costs per acre foot to be calculated at a project level (i.e. marginal costs), which means looking at the increase in water supplies from implementing the project.  The BDCP cost figure deceptively averages the cost over all State Water Project supplies - including those that would be provided without the BDCP.  Dr. Rodney Smith has an excellent example of a correct calculation of BDCP costs for comparing to alternatives on this blog post.  Dr. Smith states that "Under alternative “no tunnel” scenarios, the best case for the cost of BDCP water would be well over $1,000/AF for a non-firm water supply.  There are some scenarios where the BDCP investment may yield even a lower water supply.  In those circumstances, the BDCP investment in tunnels would become the “bridge to nowhere” in waterworld."  It should be noted that Dr. Smith's "well over $1,000" is untreated water at the Tracy pumps and does not include the cost of treatment and pumping hundreds of miles over mountains to southern California cities.
  3. Uncertain BDCP costs and yields are compared to alternatives with known or much more certain costs and yields.  The alternative costs in the chart are based on projects that are already built, under construction, more advanced in design and/or use existing technology.  There is a lot more certainty about the costs of these alternatives.  In contrast, the BDCP tunnels are only at 10% design and it is a unique project that presents enormous engineering challenges.  Furthermore, the BDCP water yield is not known and is given as a range.  BDCP cost estimates assume no cost escalation and optimistic yields.  Thus, BDCP is much riskier than these alternatives.   
  4. Alternatives are more reliable than BDCP.  Unlike BDCP, these alternatives are relatively drought proof, whereas BDCP provides no additional water in dry years.  For BDCP to generate comparable reliability, you would have to include significant costs of new storage which would raise the per-acre foot cost of BDCP water.
  5. Lower-cost alternatives are ignored.  The comparison chart picks the high-cost, high-capital alternatives under the assumption that most of lower-cost alternatives like conservation have already been implemented or will be implemented anyway. Many experts, such as those at the Pacific Institute, disagree with this pessimistic assessment of conservation.  It should also be noted that this comparison only looks at urban alternatives, when most of the BDCP water supplies go to agriculture. The simplest alternative for agriculture is to fallow lower-value crops, an action which is generally estimated to cost about $150 per acre foot.  
  6. Ignores technological advance in alternative water supplies.  While I don't fault the BDCP for not wanting to speculate about the cost of future technologies, it should be noted that the cost of these alternatives is dropping and there is a lot of technological innovation in the pipeline on water supply alternatives.
As for the first claim, $5 a month for water supply reliability.
  • $5 a month per household assumes that farmers pay the majority of the tunnel costs, which is widely known to be infeasible and this cost allocation issue is the main reason that even a draft BDCP finance plan is years overdue.  There are also some unrealistic assumptions about no cost escalation, delays and financing terms embedded in this.  I expect urban household costs to be about 3 times what BDCP estimates.
  • BDCP water is not that reliable.  Given the current drought, I think most people would not view a $15 billion piece of water infrastructure that is idle in drought years as substantially increasing reliability.

Monday, April 7, 2014

The Baseline for Drought Impacts: Valley agriculture has expanded a lot in the 5 years since the last drought.

The economic losses from the drought is the hottest topic in the Valley right now.  It is clear that the 2014 drought impacts will be larger than the 2009 drought, but how much larger?  A significant challenge in making comparisons is accounting for the remarkable changes in Valley ag over the past 5 years.  What is the right baseline for measuring fallowing and lost production?

For the 2009 drought, 2007 was arguably the best year to use for the baseline because there were already some modest drought impacts in 2008 leading up to 2009.  Although we don't have complete 2013 data yet, it is still probably best to use 2012 data as a baseline for 2014 impacts for the same reason.  Thus, I have compiled some key indicators for 2012 and 2007 for the 8-county San Joaquin Valley to see how things have changed.  The overall picture is an industry that is expanding in response to strong crop prices, revenues, and profits.

Farm Jobs in the San Joaquin Valley:
According to California EDD, there were 197,000 agriculture jobs in 2012, a 10,000 job increase (5%) from 187,000 in 2007.  Average wages increased from $10.46/hour in 2007 to $11.82/hour in 2012, an increase of 13%.

Preliminary data for 2013 shows employment was slightly higher than 2012, and wages increased nearly $1 an hour.  Farmers have complaining louder than ever about labor shortages, but total farm employment is at its highest level in over a decade.  However, farm wages have also seen significant gains in both 2012 and 2013 which supports the idea that labor is becoming more scarce.  Simultaneous increases in both employment and wages point to increasing demand for workers.  That is a sign that the industry is expanding, and the acreage data points to rapid expansion.

Irrigated Acres in the Valley:
I compiled total harvested acres for the 3 main crop types: field crops (excluding rangeland and unirrigated pasture), fruit and nut crops, and vegetable crops.

Total harvested acres in the San Joaquin Valley increased by 387,000 acres between 2012 and 2007, an increase of 7% to 5.824 million acres in the 8 counties in 2012.

Field crops increased by 72,000 acres, +2%.
Fruit and nut crops increased by 386,000 acres, +21%.
Vegetable crops decreased by 72,000 acres, -12%.

All counties expanded total harvest acres except Kern County, but Kern County had the highest increase in fruit/nut (permanent) crops at 102,000 acres in 5 years.

I have mixed feelings about this and the Valley economy.  On one hand, the strength and growth of the agricultural sector has been especially welcome in the context of a depressed overall economy.  The recent growth in agricultural wages is particularly encouraging.  On the other hand, there are good reasons to question the sustainability of this industry growth.  Many people were questioning the sustainability of over 5.4 million irrigated acres in the San Joaquin Valley back in 2007, even before an additional 400,000 acres were brought into production.  The total amount of key resources such as land and water has not increased.  I have heard a lot of comments from people inside and outside the industry about permanent crops that are planted on marginal, poor quality land, seriously overdrafting groundwater or both.

The immediate question is what is the baseline from which to measure the impacts of the 2014 drought, and how to compare the 2009 and 2014 events.  In 2009, there were about 250,000 fallowed acres compared to the 2007 baseline.  In 2012, not only were the 250,000 acres fallowed in 2009 back in production, an additional 387,000 acres of mostly permanent crops were added to the baseline level of production and are now competing for an even lower supply of water.    While it is probably best to use the more recent 2012 baseline for measuring the immediate impact of the drought, it is important to understand that this industry expansion fueled by growing plantings of permanent crops also plays a role in drought impacts.

Thursday, March 13, 2014

New PPIC Report on the Cost of Water From the Tunnels

After a quick initial read, my impression of the new PPIC report, Paying For Water, is mostly positive.  It provides a good overview of funding options and challenges in key areas.

Of course, I am always interested in what the PPIC has to say about the Delta tunnels.  There is only a brief discussion of the tunnels on page 26-27, and it correctly focuses on the major challenge of agricultural users affording the tunnels without endorsing or rejecting the tunnel proposal.  However, I do not believe it accurately characterizes the cost of water through the tunnels, and it incorrectly attributes a per acre foot cost estimate to Dr. Rodney Smith (of Hydrowonk fame).
   
BDCP puts the implicit additional water supply cost of new conveyance, based on current cost estimates, at $302 to $408 per acre-foot at the Delta.39 Additional costs would accrue for transmission, treatment (for urban users), and distribution, which could add as much as several hundred dollars to the price paid by urban water users. Others that have examined BDCP put the likely cost much higher, with estimates ranging from $500 to $1,000 per acre-foot. fn40
Footnote 40 attributes the $500-$1000 per acre-foot estimate to Dr. Smith's blog post, but this is what Dr. Smith actually said in that blog post.
Over the past couple of weeks, I have heard about alternatives to the no BDCP scenario defined by DWR.  What proves true will have a substantial impact on the cost of BDCP water.  Under alternative “no tunnel” scenarios, the best case for the cost of BDCP water would be well over $1,000/AF for a non-firm water supply.  There are some scenarios where the BDCP investment may yield even a lower water supply.  In those circumstances, the BDCP investment in tunnels would become the “bridge to nowhere” in waterworld.
I don't know how Dr. Smith's very clear and bold statement can be interpreted as $500-$1000 af.  I have joined Dr. Smith in estimating the cost of BDCP water as well over $1,000 af., and would be over $2,000af in very plausible scenarios.

The PPIC's brief discussion of the tunnels' cost continues...  
Still, for most urban water users, Delta exports in this price range would remain competitive with most other new sources of supplies. In contrast, this price increase could be prohibitive for many agricultural activities. Among the many open questions is whether water users could agree to a cost-sharing formula with lower payments by agriculture, potentially in exchange for lower reliability, or to a smaller project (lowering both future exports and costs, and using the savings to develop more local supplies in urban areas).

This is a reasonable assessment if you think the costs are under $1,000 af.  My take is a little different, and simply reflects my view that the costs are higher. 

For urban agencies, I believe the costs are on the high-end of their current alternatives.  So it is affordable but marginal investment for urban agencies if you assume a proportional cost distribution with farms.  But the costs are absurd/nonsensical/crazy (I have used all these adjectives) for agriculture, and the majority of the water exported from the Delta is used by agriculture.  Any attempt to shift the costs from agriculture to urban users make the tunnels a very bad investment for the urban users as well.  And the PPIC's other suggestion, that the cost shift be done in exchange for lower reliability for agricultural water supplies - has significant economic and social implications in a dry year like this - the financing plan for the tunnels could be the real "man-made" drought for the Valley.

Tuesday, March 4, 2014

New Temperance Flat Feasibility Study Claims Salmon Benefits and Delta Earthquake Risk Reduction Justify the New Dam and a Big Taxpayer Subsidy

I spent a good part of the afternoon reviewing the new feasibility study for the Temperance Flat dam and compared it to the one released in 2008.  The Bureau of Reclamation's claimed benefit-cost ratio in the new feasibility study is much higher than the one from 2008 that infamously found a B-C ratio of 1.0 to 1.06 despite the fact that the estimated water yield is lower.

Some observations about the benefit-cost estimates.

1.  Estimated construction costs of the dam dropped by nearly $1 billion (new estimate is about $2.5 billion compared to original of about $3.5b), even though the current estimate is in 2013 dollars and the old one was in 2006 dollars.  I am told the cost reduction is attributed to a change in the hydroelectric mitigation required.  Apparantly, it isn't true that estimated construction costs always go up.

2.  The new feasibility study justifies the dam for its ecosystem benefits to salmon.  It values the ecosystem benefits 2-10 times higher than the water supply benefits.  In addition to economically justifying the dam, this finding also is convenient for justifying a much higher taxpayer subsidy of the dam than proposed in 2008 (more on that later).  These multi-billion dollar ecosystem benefits (annual benefit estimates ranged up to $500m per year) result from the report's estimate that the dam will increase long-run average abundance of salmon from between -0.7% and 4.9% per year.  I'm not a biologist, but that doesn't seem like a huge benefit to me for a river that is projected to have relatively small salmon populations.  This recasting of the dam as a salmon project is very surprising to me as I am not aware of any environmental groups or fishery experts pushing Temperance Flat dam as a priority, and there are even some environmental groups who are opposed.

3.  The report is quite honest that the traditional water supply, flood control, hydropower, and recreation benefits that are associated with dams are not nearly high enough to justify the construction costs of this project.  And that's even after the report inflates these traditional benefits...

4.  In the "best" scenario, the report estimates $19 million in annual agricultural water supply benefits from an average increase to ag. water supply of 41,000 af.  That's a healthy $461 af in current dollars, a value that is about 3 times higher than typically used for incremental ag water in benefit-cost assessments.  Given the special role of agriculture as the economic base of the Valley, I have sometimes argued for using a more generous economic development measure that includes multiplier effects.  Like many of these assessments, this feasibility study also calculates the economic development value in a separate section.  In Table 5-12, the report estimates this annual value at $10.8 million for agriculture, which seems about right for 41,000 af of annual yield.  The strange thing is that this economic development value is lower than the value used in the benefit-cost estimate, and it is usually the other way around.  This seems to confirm my suspicion that the $19 million value associated with ag. water supply reliability is an error.  Bottom line, the agriculture water supply benefits are overestimated by a factor of 2-3, at least $10 million per year.  [Update:  I have now seen the technical appendix, and it turns out that this huge agricultural value results because the model they are using allocates the majority of new agricultural water produced by Temperance Flat to recharge groundwater where it has a much higher economic value than growing crops. This is an interesting finding and if it accurately measures the value of recharging groundwater and/or the external cost of pumping groundwater on other users of the aquifer, it makes a powerful argument for regulation of groundwater.]

5.  Delta earthquake and flood protection benefits.  The feasibility study estimates $25 million in annual benefits from emergency water supplies Temperance Flat would provide in the event of a catastrophic Delta flood.  This benefit is inflated due to ridiculous assumptions about levee failure probabilities among other issues.  As a point of comparison that shows the foolishness of this number, it is almost identical to the risk-reduction benefits the BDCP estimates for the Delta tunnels which are thought to preserve several million acre feet of water exports in the case of these catastrophic events.  [The BDCP estimates 50 years of this benefit has a present value of $364m to $460m, use the present value formula to solve for the annualized value and it is in the neighborhood of $25 million annually.  This Temperance Flat study allocates over $400m of construction costs to taxpayers due to this benefit.]   

6.  The benefit-cost analysis uses annual costs and benefits.  It annualizes capital costs over 100 years with a 3.75% discount rate.  That is a very generous assumption, and it understates the annual costs.

Some observations about the proposed cost allocation for Temperance Flat.

1.  Only 26% of the cost of the dam would be allocated to water users (12% ag, 14% municipal/industrial).  In contrast, the 2008 study of the dam allocated the majority of costs to water users.

2.  About 73% of the cost of the dam would be paid by federal and state taxpayers.  The 73% allocation can be broken down into three general categories of claimed public benefits: 49% ecosystem, 8% recreation/flood control, and 17% emergency water supply benefits from a Delta flood (see #5 above).  This 73% share is only direct construction costs, and does not count the subsidy in the Bureau's 0% financing of agricultural users contribution.

So that is about $1.25 billion in taxpayer dollars towards dam construction for claimed salmon benefits (direct costs, this doesn't count interest costs on the water bond that would finance the state's share).  I wonder what a salmon expert would do if you gave them $1.25 billion of taxpayer funds and said spend this to improve salmon habitat.  

In addition, it allocates 17% of the dam's costs (nearly $500 million) to state/federal taxpayers due to the Delta flood risk reduction benefits (see #5 above).  Taxpayers might prefer to spend $500 million in Delta risk reduction would be better spent directly on Delta levees themselves - providing flood protection benefits for water supplies and protecting property, other infrastructure and lives in the Delta. 

Some observations about financial feasibility calculations for water users.
  
Unlike BDCP, this report correctly proposes a cost allocation before making any conclusions about financial feasibility. 

1.  Agricultural water supply is allocated $264 million of construction costs.  Assuming 40 year repayment period with no interest, and operating costs comes to $8.7 million per year.  The report estimates the cost of the incremental water supply to the agricultural users is $212 af.  That's a hefty cost for agricultural water, and note that this is the cost even with the Reclamation's generous no-interest financing and taxpayers picking up 73% of the estimated construction cost of the dam.

2.   Municipal and industrial water supply is allocated $362 million of construction costs.  The report assumes a 40 year repayment of capital costs and 5.37% interest.  Principal, interest, and operating costs come to $27.4 million annually, and the incremental water supply cost to M&I users is $1,305 per acre foot. That's a pretty expensive municipal and industrial water supply, even with taxpayers picking up 73% of the estimated cost of the dam.

Overall, it's not a very convincing feasibility study, and I don't believe it provides strong economic justification for Temperance Flat dam.  It's disappointing, because I believe in the value and need for storage and I would like to be able to support storage projects in the Valley.  But there are better uses of taxpayer dollars for these and other purposes, and the water it is still an expensive option for water users even with the large taxpayer subsidies.  

Monday, March 3, 2014

What's the value of water to agriculture?

Over the past month, lots of people have been emailing me the $1,100-$1,200 per acre foot price for price irrigation water is selling for in a Kern County auction.  It is indeed an incredible price for agricultural water.  It shows that this drought is very severe and likely will impact some high-value permanent crops, and it tells us what orchard owners are willing to pay for one year to keep an orchard alive when they have few other alternatives.

But what does this data point tell us about the value of water to agriculture in California?  What is the value of agricultural water that should be used for major policy analysis - such as evaluating infrastructure investments such as Delta tunnels, new reservoirs, alternative agricultural water supply investments (like solar powered groundwater desal), or intra-regional conveyance to facilitate more local transfers between Valley farmers?

I would caution people from over-interpreting the $1,100 per acre foot price.  In fact, the same article in the Bakersfield Californian that reported the $1,100af auction, also reported this...
Buena Vista plans to use part of the proceeds from the auction to pay for a land fallowing program within its district. It has offered to pay farmers $400 per acre not to farm this year to reduce demand on the aquifer.
It had hoped to be able to fallow 4,000 to 5,000 acres.
The district ended up getting applications for 11,000 acres, Etchechury said.
After weeding through all the applications, he said, it looks like about 7,500 acres are eligible for the fallowing program, which could cost the district $3 million.
Thus, in the same county where farmers are willing to pay $1,100 per acre foot, a 50,000 acre water district on the west side of the Valley has 7,500 acres (about 15% of the district) accepting $400 per acre to forgo planting. Assuming 3-4 feet of water to grow a crop, this second data point suggests the marginal value of water in agriculture on the west side of Kern County is about $125 per acre foot.  [Data on irrigated land rental rates from the California Department of Food and Agriculture (see page 2) imply a similar value.  CDFA reports irrigated cropland rents for an average of $340 per acre in 2012, and non-irrigated land rents for $40 an acre, a difference of $300 per acre.]

This $1,000 af difference in agriculture water values in the same year in the same area shows large gains could come from local trades, and that there would be considerable value to infrastructure and market institutions to support local, intra-county and intra-basin trades between farmers.  It seems that these sorts of investments could make a lot more financial sense for the San Joaquin Valley than the $15 billion tunnels under the Delta.

Friday, January 24, 2014

Comparing Immigration Proposals for Detroit and the Valley

This is an interesting proposal.
Michigan Governor Rick Snyder unveiled a proposal on Thursday that calls for the U.S. government to allocate 50,000 special visas over the next five years to lure highly skilled immigrants to live and work in the bankrupt city of Detroit.
The theory is that attracting a critical mass of high-skill, high-education immigrants to Detroit would create many jobs by attracting talent-seeking employers as well as stimulate entrepreneurship and new businesses founded by the immigrants.

Here in the Valley, political leaders are pushing for a different program that would provide green cards to immigrants after 5 years of low-paid farm labor.

Detroit and the Central Valley are two places in the U.S. struggling with economic woes and municipal bankruptcies.  The Governor of Michigan, with the endorsement of Detroit's mayor, wants to use immigration to stimulate entrepreneurship, attract new industries and change the local economy.  In contrast, Valley leaders are looking for immigration reforms to attract a low-paid labor force to help its largest and most-profitable existing industry.

The contrast is interesting, special visa programs can be seen as a way to create a new economy or preserve an existing economy.  Immigration is complicated and involves much, much more than economics, so this shouldn't be seen as an endorsement or rejection of either proposal.

Tuesday, January 14, 2014

Should there be regulation of economic activity in drought zones?

There is widespread recognition that historical federal policies such as flood insurance have encouraged undesirable development in areas that predictably flood, and have increased the cost of flood disasters.  Public policies are changing to address this issue.  The policy changes and proposals at both federal and state level include:
  • significantly reduced subsidies for flood insurance
  • stronger requirements to purchase insurance
  • limitations on new development in flood plains
  • requiring flood-proofing investments
These changes in flood zone policies are phased in over time and have to be sensitive to historic communities in these areas, and are often opposed in the communities in flood zones that bear an increase in costs.  The overall thrust of policies is change behavior in ways that reduce risk to predictable hazards.

Similarly, high fire hazard areas have seen changes to regulations; including stricter building codes, increased fees, and changes to insurance that add costs to living in fire hazard areas and are unpopular in these areas.

Today, California is facing the prospect of substantial drought impacts on the agriculture economy for the second time in five years.  These severe drought events are predictable, occurring at least once per decade and they have a significant economic and human toll on the areas where drought impacts are most concentrated in California, the west side of the San Joaquin Valley.

And similar to historical policy towards flood zones, historical water policies such as the Central Valley Project have encouraged increased investment and growth of vulnerable populations in areas where the risk of drought are greatest (see chart below).  Similar to the treatment of floodplains, is it time to think of policy changes to reduce the economic risk and suffering from future droughts?  Climate and water experts predict these shortages may become more common with climate change.  Here are a few initial ideas for reducing economic risk in "drought zones":
  • Restrictions on investment in permanent crops that harden demand for water  (I once heard a fisherman call this tree limits, similar to catch limits and regulations governing fisheries)
  • Mandatory contributions of farmers in these areas to social insurance funds that are tapped to help unemployed workers and local communities in drought years.  This would reduce economic risk of drought-induced fallowing in two ways, 1) direct assistance to individuals affected by drought-induced unemployment, and 2) encourage the cultivation of less labor-intensive crops or the introduction of more capital-intensive and less labor-intensive production methods.
  • If not mandatory, policies could reduce subsidies for farms that do not participate in voluntary drought-risk reduction programs, just as the CVP has a higher full cost rate for water for some farms that exceed acreage limits.
Just like changes to flood zones and fire hazard areas, I have no doubt that policies like this would be vociferously opposed by farmers in drought hazard areas like the west side of the San Joaquin Valley.  But when economic disasters repeat themselves in predictable ways, it is time to look for new ideas to reduce risk.  There may be better ideas than my initial suggestions, and I encourage others to develop them.

Postscript:  Unemployment rates on the west-side of the San Joaquin Valley since the Central Valley Project began delivering water to the region in 1968.

Tuesday, December 10, 2013

Comparing the Financial Hole in the Delta Water Tunnels Plan to High-Speed Rail

A comment I made comparing the tunnels to high speed rail was printed in the San Jose Mercury News, "The financial hole in this is at least as large as the financial hole in the high-speed rail plan."  People are interested in the comparison between these so-called legacy projects, so here are some of the simple calculations behind the statement.

In both cases, the "hole" in the capital financing for the project is an unrealistic projection of funds provided from a key source.  In the case of high-speed rail, the hole comes from federal government appropriations that are unlikely to materialize.  In the case of the tunnels, the hole comes from the unrealistic expectation that farms will pay the majority of the costs since the majority of the water is for irrigation.

The high-speed rail business plan estimates capital costs for the full blended system at $68 billion.  It estimates of non-federal sources of funding at $26 billion, mostly from 2008 Prop 1A bond funds and a defensible estimate of private capital contribution.  The big problem is $39 billion of the $68 billion is projected to come from Federal funds, but only $3 billion has been committed and there is no reasonable expectation of more in these days of sequester.  So that is a $39B hole in a $68B cost, or 57% of the capital costs. [The recent court ruling against HSR was partially based on the financial hole in the initial operating segment of the HSR line which is estimated to cost $31 billion, and unrealistically assumes $20 billion in additional federal funds.]

As for the tunnels, construction costs are estimated at $15 billion in 2012 dollars.  (Note: The HSR cost estimate is in year of expenditure dollars and accounts for inflation, and tunnel costs have not been.  A similar adjustment to tunnel construction costs would increase capital costs to $19 billion.)

Urban agencies have committed to paying for about 1/3 of the tunnel costs for 1/3 of the water.  (I have heard anything from 25% to 40%, so I will go with 1/3 to keep it simple.)  Their leaders have repeatedly vowed they won’t subsidize the agricultural costs, and all the statements they have made about ratepayer effects depend on this assumption. 

That leaves a 2/3 share for agriculture.  What can we reasonably expect them to pay?  What is it worth to them?  BDCP’s optimistic modeling shows that SJ Valley agriculture will see gross revenue increases of about $130 million per year if the tunnels are built.  If I assume a 40% profit margin on growing these crops, that would be about $50 million in increased profits. San Joaquin Valley farmers also get some water quality and purported seismic risk benefits from the tunnels, that might push up the willingness and ability to pay for the tunnels to a total of $100 million per year.  Under the optimistic scenario in a recent presentation on Delta tunnel finance to the Westlands Water District board, debt service and operating costs for the tunnels will be $1.3 billion per year.  Thus, it is only reasonable to assume that agriculture should only be willing to pay about 8% of the tunnel debt service.  Thus, if urban ratepayers pay 33%, farmers pay 8%, the hole is 59% of the tunnel capital costs which is a little bit more than the 57% hole in the HSR capital funding plan.

Another quick way to look at the agriculture benefits from BDCP is to consider the value of land that would be fallowed without it.  BDCP would keep between 0 and 200,000 acres of marginal cropland in production (the tunnels do not help water supply in dry years, and farmers rationally fallow the worst land first, so BDCP isn't impacting the best land).  That marginal land might sell for $6,000 an acre, so if we optimistically value keeping that land in production at $6,000 per acre, it comes to $1.2 billion of the $15B tunnel costs, or 8% of the total.  Add that to the 33% urban share, and there is still a 59% hole.

There are fancier ways to measure this financial problem, but it will not change the conclusion that there is large hole in the tunnel financial plan that will have to be filled with a massive subsidy of farmers by urban ratepayers or taxpayers.  

P.S.  I should mention that there are actually two holes in the BDCP financial plan, and the funding shortfall for the habitat components typically get even more attention.  BDCP habitat plans depends on water bonds passing and uncertain federal funding.  That's a major problem too.



Wednesday, December 4, 2013

Detroit bankruptcy process moving much faster than Stockton

Municipal bankruptcies are rare, so I don't know how long the process takes.  Former City Manager Bob Deis said Stockton's bankruptcy was progressing at "warp speed," but it looks like a turtle compared to Detroit... so far. 

Stockton filed for bankruptcy in late June 2012 and its eligibility trial was 9 months later in late March 2013.  It was found eligible shortly after the trial in April 2013. 

Detroit filed for bankruptcy in mid-July 2013 and its eligibility trial was in early November, about 3.5 months later.  The eligibility ruling was issued yesterday, about 4.5 months after the filing and the ruling covered more ground than Stockton's case, specifically on the issues of pension protection.

Thus far, Detroit has been moving twice as fast.

Furthermore, Detroit plans to file its plan of adjustment within 2 months of the eligibility ruling, while that process took Stockton over 5 months.  Stockton negotiated deals with most of its creditors during that time, and Detroit's case appears headed for appeals.  So appeals could slow down Detroit, but the Detroit ruling could also slow down Stockton's process.

Articles in today's NY Times and Sac Bee suggest that the one creditor who has yet to settle with Stockton, Franklin Templeton, may be newly emboldened by the Detroit ruling to fight the plan of adjustment rather than reach a settlement of their own.

(from NY Times) Even before Tuesday, Franklin was warning that it would challenge to Stockton’s plan. Documents on file with the court suggest it was planning to argue that no plan could be “fair and equitable” if Calpers were paid in full while Franklin received less than a cent on the dollar.
“Their argument just got strengthened,” said Karol K. Denniston, a bankruptcy lawyer at Schiff Hardin in San Francisco who has been advising a taxpayers group that formed after Stockton declared bankruptcy. Referring to the judge’s decision in Detroit, she said, “Franklin Templeton is going to have a lot to say about this ruling.”

(from Sac Bee)  Denniston said the Detroit ruling could also affect the Stockton bankruptcy. Even though Stockton left its CalPERS payments untouched and made debt-restructuring deals with most of its other creditors in October, the city still hasn’t reached agreement with one major lender, Franklin Templeton. The Detroit decision could give the Franklin firm an opening to demand that Stockton officials treat CalPERS like every other creditor, according to Denniston. (from Sac Bee)

Read more here: http://www.sacbee.com/2013/12/03/5966594/bankrupt-detroit-can-cut-pensions.html#storylink=cpy

Both cities are still in bankruptcy, so it is still to early to know who will emerge the fastest. But Detroit certainly has come out of the gates faster.

Tuesday, November 26, 2013

Is the Bay Delta Conservation Plan Blog Proposing an Urban Subsidy of Agricultural Users in BDCP?

Recently, I have heard Mark Cowin and other state and local water agency officials repeatedly state that there will be no urban to agricultural subsidies for water supplies from the twin tunnels.  They have dismissed the notion as a "rumor".

How do these rumors get started?  Why won't they go away?  Look no further than the latest pro-tunnel propaganda from the Bay Delta Conservation Plan blog,  "Mature Choices for a Mature State."

In the piece, the tunnels are described as an affordable choice by comparing its per capita cost to the per capita cost of the Hetch Hetchy upgrade that only serves urban customers in the highest income area in the United States. 

In contrast, the vast majority of water that would be delivered through the tunnels is for irrigating crops, not urban use.  And state and water agency officials continue to vow that the tunnels will be paid for on an equal basis per bucket of water, not on a per capita or per household basis. 

If water leaders want to stop those urban-agriculture subsidy rumors, then they need to stop repeating this idiotic argument that compares per-capita costs of the tunnels to the per-capita costs of urban water infrastructure.   

The second obvious problem with this blog post is that it assumes that the tunnels are the only solution to the seismic risk of levee failure.  In fact, in all the other infrastructure examples in the blog post, the post describes seismic upgrades to the existing infrastructure - not outrageously expensive bypasses to the existing system.  The common sense, "mature" approach to addressing this risk is to invest in seismic upgrades of the levees themselves.  This is much cheaper and most importantly, it protects many more things from the seismic risk, including public safety which the Resources Agency has described as their top priority.  Thus, seismic levee upgrades both cost less and provide more benefits than the tunnels. 

Pushing the tunnels as a solution to seismic risk and ignoring seismic upgrades to the Delta levee system is not mature.  It is economically and morally wrong.

Thursday, November 14, 2013

BDCP Statewide Economic Impact Results Illustrate Why BDCP Is a Disaster for California Agriculture

According to the BDCP Statewide Economic Impact Report, implementing BDCP would have the following effects on crop revenue in California. 

Revenue Gain to SJ Valley Farmers From Improved Water Supply:  +$134 million (page 5.1-21)
Loss to Delta Revenue From Agricultural Land Retirement for Habitat:  -$89 million  (page 5.1-16)
Loss to Delta Farm Revenue From Salinity: -$2 million  (page 3.1-13)

Thus, the total net change in farm revenue according to the BDCP statewide economic impact report is $41 million annually. 

When interpreting this $41 million, remember this is gross revenue, net revenue or profit is significantly lower.  Also, this is the BDCP's estimate based on their optimistic water supply and delta salinity scenarios.  I believe the outcome will actually be worse.

How much will the state's agriculture industry pay to receive these miniscule benefits from the tunnel plan? 

Although the BDCP has not finalized an ag/urban cost allocation, the heads of the urban agencies have been repeatedly promising their boards that there will be no agricultural subsidy and every water user will pay the same amount per unit of water received.  Since BDCP is estimating debt service and operating costs at $1.2 billion annually (their figure, this understates likely financing costs) and agriculture receives at least 2/3 of the water, the farm share of the tunnel bill looks to be at least $800 million per year according to the leaders of the water agencies who pledge to pay for the tunnels.

Thus, the BDCP documents suggest the financing cost of BDCP to the statewide agriculture industry will be roughly 20 times higher than the net gain in statewide agricultural revenue.

With those kind of numbers, I don't think it is an exaggeration to call BDCP an economic disaster for California agriculture. 

While there may be a few individual farmers who could benefit in some way, I don't see how anyone who claims to be representing the statewide interests of California agriculture can possibly support BDCP. 

Finally, I should note that there are some agriculture impacts missing. 
On the negative side, it leaves out the land retirement for tunnel construction and the potential upstream impacts on upstream farmers in the Sacramento Valley and San Joaquin tributaries (I have been told that the reason BDCP predicts low salinity impacts in the Delta is that those farmers will be giving up water).
On the positive side, there are some water quality benefits to SJ valley production that are not reported separately in these reports, and some potential to reduce groundwater pumping costs for some farmers receiving exports in the SJ Valley.

None of these missing impacts would be remotely large enough to change the BDCP disaster for agriculture.  No wonder Dr. Rodney Smith is predicting a 90% probability that the agricultural contractors drop out of BDCP by June 30, 2014.

Friday, October 18, 2013

What happens if Measure A fails?

Measure A and the bankruptcy exit plan are directly linked and have some flaws (my discussion of those flaws has been highlighted by opponents on a flyer).  The question to voters is will the alternatives that emerge if Measure A fails be better or worse for the City?  

There are several clear short-term impacts if Measure A fails:  1) the hiring of cops for the Marshall Plan on crime will be delayed, 2) Stockton taxpayers will save about $27 million (about $90 annually on per capita basis, although sales tax is paid by residents and non-residents).

Other impacts are less clear and direct.  Here is my take on some key questions.
 
1)   Will a tax proposal on the ballot next year be better or worse than the current proposal?  Will it be an unrestricted or restricted tax? Will there be competing tax proposals on the 2014 ballot?

As I listen to the debate around Measure A, a lot of the opposition is that it isn't a restricted tax, and if it fails - there will probably be a big push for a restricted tax.  It is possible there could be competing tax proposals (restricted and unrestricted) on the ballot, a situation that was avoided this November when the Safe Streets initiative faded and the Mayor compromised and supported Measure A.

A restricted tax is a bad idea for a City in bankruptcy, as well as one that has recently emerged from bankruptcy and has a really thin budget.  While in bankruptcy negotiations with creditors, a restricted tax is simply bad faith, and the City clearly needs some additional funds to finance a plan of adjustment and taxes legally restricted to police would make the path out of bankruptcy very difficult.

If the Plan that replaces Measure A looks like the Safe Streets restricted tax initiative, the City is worse off.

It is also possible that an unrestricted tax could be significantly worse than Measure A.  Some alarming recent evidence of this is in the Stockton Police Union's statement of neutrality on Measure A.  The Union wanted a salary floor, based on a salary surveys of other cities, placed into the fine print of the ordinance.  That is really poor fiscal practice reminiscent of what drove Stockton into bankruptcy in the first place.

I fear that some of the alternatives to Measure A could lock some negative budget choices into the tax measure itself - as evidenced by both the former Safe Streets proposal and the salary floors the Police Union tried to negotiate into Measure A. 

It looks like future tax alternatives are likely to be worse, not better than Measure A as I had hoped.  Thus, this is a reason to vote for Measure A.

2)  How will passing Measure A and B affect the bankruptcy case?

Until recently, I didn't think that Measure A and B would have a major impact on how a judge would rule on the bankruptcy plan of adjustment.  In fact, one of my concerns about Measure A/B has been that they would pass and then the judge would subsequently rule against the City's plan of adjustment.  This outcome would have put the City in a very tough political and financial bind.  I thought it was a strong argument for delaying a tax vote until next year when more bankruptcy issues would have been sorted out.

In a big surprise to me, the City and Assured Guaranty, the City's largest and most antagonistic bond creditor reached a settlement deal that depends on the passage of Measure A.  This settlement and others recently announced by the City means that we know a lot more about the bankruptcy exit plan if Measure A passes, and that there is an extremely high probability that the plan will be approved by the court if Measure A passes.

I have reviewed the settlement with Assured Guaranty, and I think it is reasonable.  The City was never going to get a creditor loss as large as their original ask, and I think this deal will result in a 30%-50% loss for the creditor that is comparable to the loss by City retirees and is thus pretty close to what would have eventually been approved by the court. 

Contrary to my original expectations, it appears that passing Measure A will directly lead to a bankruptcy exit plan approved by the court, and the City would formally exit bankruptcy some time next year.  This will directly save the City millions in additional legal costs, and I doubt it could have done much better with creditors if it pushed for a "cram down" in court.  Less directly, getting rid of the bankruptcy stigma will be good for the City's image, and I think it will be good timing that makes it more likely that the City will  benefit from the improving economy.   Thus, this is a reason to vote for Measure A.

3) Can the City be trusted to keep all the promises in Measures A/B: including hiring 120 cops, sunset the tax measure in 10 years, and finance a plan out of bankruptcy that is acceptable to creditors and employees? 

It is exceptionally hard for the City to keep all these promises, and that has been my concern about Measure A/B from the beginning (but restricted taxes are not the answer).  Something has to give.  As discussed in previous posts, that something appears to be sunset measure in Measure A.

It is bothersome to me that the City puts the sunset clause prominently in the ballot measure, and then hides the City Council's option to extend it in the fine print.  And as I have pointed out, their bankruptcy exit plan and even their settlement with their largest bond creditor assumes Measure A is permanent.

Although it is not reflected in their current plan, even if Measure A passes, the City Council can take actions to hold down cost increases (primarily through the negotiation of new employee costs) and put the City on track so that Measure A can sunset, and if it is extended in a decade, the City should be financing additional service recoveries, not just maintaining bankruptcy levels.  In my earlier blog post when I said the City Council should reject the plan of adjustment, I was saying that they should revise their financial plan filed with the court to show greater cost control so that Measure A can expire.  Even though many of those future costs are uncertain, revising the plan would set more reasonable expectations for employee unions and other stakeholders. 

While the City Council did not reject/revise the financial plan, it is clear to me that they heard the message and the projected increase in costs are not obligations.  It is up to them and the citizens of the City to stay engaged in the long-range financial projections and demand that the City keeps a tight lid on its costs.  This is true whether or not Measure A or any future tax measure passes or fails.

The City's bankruptcy exit plan is financially tenuous, does not account for a Measure A sunset, and by assuming employee compensation (not counting increasing pension costs) grow faster than projected revenue, the plan seems to prioritize employee compensation over restoring City services.  This is a reason to vote against Measure A.

4) Will the City have to shut down libraries and fire stations if Measure A does not pass?

Only if the City Council chooses these options to balance the budget, and if they do, they should be voted out.  I don't think this will be necessary for two reasons 1) the real estate rebound will boost property tax revenue in the short-run, and 2) the City has other less unpleasant options to reduce costs, and has used them in the past when facing deficits.

How much will property taxes rebound?  Earlier this week, the state Board of Equalization released an estimate of a 5% increase in valuations for San Joaquin County as a whole as of 1/1/13.  The City budget assumed less than a 1% increase this year, and assumes a 2.5% increase next year.  Assuming City property taxes actually increase 5% this year and next year, the City could expect about $5 million more over this year and next than its current projections.  That would address about half of the anticipated deficit, and that would be enough to balance the budget at current levels if the City were not incurring bankruptcy legal costs or if CalPers were not increasing its rates.  The budget would be very bad, but I am not convinced it would require closing libraries and fire stations below the current low level of services.  

However, there will be a significant impact on City Services if Measure A fails, the hiring of additional police for the Marshall Plan will most definitely be delayed.

Getting more police on the streets now is a reason to vote for Measure A.  Concern that the City might have to close its libraries is not a reason to vote for Measure A.

5) If Measure A fails, does that mean the City will take on CalPers and cut pensions?  Will it walk away from the Arena and give it to creditors?

No, the City has clearly indicated it will not go down either of these paths.  There are good financial reasons not to even though I think it is clear that building the arena and approving more generous pensions were past financial mistakes.

Politically, it isn't going to happen either.  Did you see the Stockton mayor or any members of the City Council with Chuck Reed when he turned in his pension reform initiative?  It is possible that blocking the City's negotiated settlements with a No vote, could result in the CalPers issue being raised by creditors in court as a reason to reject any "cram down" the City may try to impose on them.  But the court can't impose a CalPers cut on the City and I would guess the City would sweeten its offers to creditors even more before going after CalPers.  As I discussed in an earlier post, even Stockton's anti-pension crowd is just proposing a cap, and even if it is successful, it is unlikely to yield budget savings worth the cost.

If you are a pension reform advocate in Stockton, you should support Chuck Reed's statewide pension reform initiative and try to get Stockton to take advantage of it if it passes. 

Voting against Measure A will not lead to meaningful pension reform or savings.   

6) If Measure A fails, are there better options for Stockton to exit bankruptcy other than a sales tax increase?

Sales taxes are regressive, encourage poor land use and policy choices by city (subsidize retail!), and are an overall lousy way to finance local governments.  But in California, that is just about the only tax that cities can adjust.  The only other real option would be to raise the utility users tax, which is arguably even worse, and Stockton's utility users tax is already much higher than other comparable cities, while there are nearby cities that have sales taxes higher than Stockton. 

The City needs a tax increase to exit bankruptcy and improve public safety.  There are not any better options than an unrestricted sales tax.


My bottom line:

When the City released its bankruptcy plan of adjustment, I moved from leaning slightly in favor of Measure A to a neutral position with consideration of not supporting it.  This was primarily due to reason #3 above, and my concerns were discussed in detail in this September 30 blog post that has become a favorite of Measure A opponents. 

Since September 30th, three developments have changed my thinking a little and I am now leaning in favor of Measure A.

1.  Assured Guaranty made a reasonable settlement with the City a few days later, contingent on Measure A passing.  The deal is beneficial to both parties and was the key to paving the way out of bankruptcy.  The deal seems to eliminate most of the risks to Stockton of passing a tax increase before the bankruptcy case is resolved.

2.  I have done some more thinking about what kind of tax we might see to replace Measure A, see the discussion under #1 above.  Listening to Measure A opponents push a restricted tax and seeing this letter where the Police Union tried to negotiate a salary floor into the Measure A fine print convinced me that economics professors would not be writing a future tax measure, and that there is likely to be something worse than Measure A on a future ballot if it fails.

3.  Concerns about escalating costs and the projections in the financial plan of adjustment have been heard, if not acted upon yet.  I am concerned that the City's financial plan sets unrealistic expectations about the ability of the City to provide COLAs and raises for its employees going forward.  But these projections are just planning assumptions, they don't reflect contracts.  I have been assured that City leaders understand the long-run budget reality and will hold the line on costs.  It is up to the citizens of the city to remain engaged and ensure that they do.

Monday, October 14, 2013

Speech at the Restore the Delta Event

Last week, I gave the keynote speech at a Restore the Delta event.  Below is the speech I wrote for the event.  For context, it was a party and I was following a comedian whom I had been informed in advance was doing a routine titled "the Plan", hence my references to "the Plan" and attempts to be funny.  Also, I was accepting a "Delta Advocate" award and thus the premise of the speech is about how I was originally uncomfortable receiving an "advocate" award, but after studying these issues for several years I am now comfortable with the term.

I recall my first contact with Restore the Delta.  It was 2008, I was new to the area and attended a water issues forum held at Pacific.  I was expecting a small crowd, but the University Center was packed, and on the way out I picked up this bumper sticker – Restore the Delta: Fishable, Farmable, Swimmable, Drinkable (hold up sticker) 
What a nice positive message.  I put the bumper sticker on my car.  I didn’t even know Restore the Delta was an organization, I thought it was just a nice sentiment – like “Practice Random Acts of Kindness” or “I love puppies.”  Not long after that, I heard Barbara Barrigan-Parilla on the radio and I realized Restore the Delta wasn’t about hugging puppies.  
I was told by leaders that Restore the Delta was a tiny, self-interested, NIMBY group that was going to be rolled over for the “greater good” of the State’s economy… and I scraped that offensive bumper sticker off my car. 
I didn’t know if “the Plan” was the best thing for California or not.  But it was clear that there was misinformation in the media, and that there had not been any real attempt at benefit-cost analysis.  After 4 years and 3 significant economic studies I have now come to the conclusion that “the Plan” is bad for the state, and that there are better, less costly solutions.  At the same time, I have watched Restore the Delta grow from a noisy NIMBY group to a statewide organization that has a compelling vision that benefits the Delta and the entire state.
I have been asked to briefly describe my conversion into a Delta Advocate without using too many boring economic numbers.  So here goes.     
In 2009, the nation was in the worst economic crisis since the depression, and the Central Valley was the center of the storm in its worst crisis ever.  We had a new President with a 3-prong plan for the economy: stabilize the banks, help homeowners and stop foreclosures, and stimulus.  The President was able to get 2 of the 3 actions through Congress and did little or nothing to address the foreclosure crisis devastating the Valley.  Part of the blame goes to misinformed Central Valley Congressional representatives who were blaming their rising unemployment rate on a 2-inch fish, the Delta Smelt.
In 2009, California was in the 3rd year of a severe drought, and 5% of irrigated agriculture was fallowed due to lack of water.  But the owners of that 5% of farmland have political influence, and the news media was lapping up the “Fish or Families” campaign, flying in from New York, driving right past the 70,000 people in the Valley who had lost their jobs due to the foreclosure crisis, to blame the rising unemployment rate on a 2-inch fish.   
I was finishing up my first year at Pacific, and that summer my Center put out our first special report on water, “Unemployment in the San Joaquin Valley: Fish or Foreclosure?”  It laid out the facts about job loss and what caused it.  The report got some attention, Restore the Delta asked for an interview for their documentary film, and most importantly – and to their credit – economists from another University corrected their mistake and recalculated their estimates of job loss to something very close to our numbers.  That report established our credibility, and it slowed – but did not stop the flow of economic misinformation.
In 2011, I was hired by the Delta Protection Commission to lead a team of experts to develop their Economic Sustainability Plan for the region.  The best decision I made in that process was to hire Dr. Robert Pyke as my chief engineer, you will hear from him a little later.  Up until that point, all of my water research had been focused on the rest of the state, I was woefully ignorant of the Delta itself.  I had never seen it from a boat; I believed the news stories of crumbling levees and the inevitable earthquake disaster; I didn’t know the communities or think there was much out here but crops. 
Dr. Pyke educated me about the levee system, but I wasn’t about to go out on a limb with a crazy, old Australian so I consulted other engineers and sources.  We uncovered other unreleased DWR consulting reports that had come to similar conclusions, and published levee data the state had been sitting on for 4 years.  Then, “the Plan” brought in national experts to publically review our recommendations for investing in levees and not in tunnels.  Their expert panel said our levee strengthening recommendations were too weak for public safety needs.  Their expert said the earthquake risk to water exports did not justify the multi-billion dollar investment in a tunnel or canal.  And their review panel echoed our call for a full benefit-cost analysis of the tunnels.
Soon thereafter, calls for benefit-cost analysis of the tunnels were coming from everywhere: Congress, the state legislature, academics and the editorial pages.  By the summer of 2012 I had grown tired of the state’s inaction and drafted my own benefit-cost report using the Plan’s data.  I found $2.50 in costs for every $1 in benefits to the state; a very bad investment.  “The Plan” has now responded with some unconvincing new economic reports, but they have done little to change the growing doubts around California about the financial viability of “the Plan.”
This research has convinced me that Restore the Delta’s common sense call for levee investments and freshwater flows through the Delta is the best approach for California as a whole.  It is clear that Southern Californians are better off spending their money on modern, sustainable water supply alternatives, and that farmers can’t afford the tunnels.
So tonight I am going to be an advocate and put this sticker on my car [display stop the tunnels], and after the tunnels are stopped, I will replace it with this pretty one [display swimmable/fishable/farmable].
In closing, I would just like to say what it means to me to be a Delta advocate.A Delta advocate cares about this special place, and wants future generations to enjoy a Delta that is fishable, farmable, swimmable, and drinkable.  But being a Delta advocate is more…
It means being an advocate for facts over fear in policy debates. It means being an advocate for good government.  Demanding government agencies follow their own rules, and act responsibly with taxpayer and ratepayer dollars. It means being an advocate for enduring values like environmental sustainability, fairness, democracy and the rule of law.
But the best part of being a Delta advocate is the great Delta wine, food and good friends.  Thank you for your support, and I hope you all have a great time tonight.

As always, the speech as delivered varied a little since I was trying not to read and was interacting with the audience.



Tuesday, October 8, 2013

How Much Would Capping Pensions Help Stockton?

I participated in an issue forum on Measures A and B, Stockton's proposed 3/4 cent sales tax increase, last night.  I was the economist pointing out pros and cons of the tax plan, but not taking a stand one way or the other. 

The most outspoken opponents of the tax are generally opposed to the City's approach to bankruptcy and want the City to cut pension benefits in bankruptcy.  They score a lot of points when they talk about six-figure pensions.  The enhanced pension benefits that allowed safety employees to retire at 90% of their highest salary levels certainly created some ex police chiefs who are collecting nearly $200,000 per year while retired in their fifties. 

The tax opponents' solution: cap pensions at $100,000 per year.  It's an appealing idea, especially when one considers the inequitable impacts of the City's approach to cutting retiree benefits entirely by eliminating healthcare benefits.  That hit lower income retirees the hardest, and if the City was going to take more from retirees by addressing pensions, I would agree that these high pensions or "spiked" pensions would be the first place to look.

But how much would that solution save?  And how hard would it be to implement?

I pondered that after the forum, and looked up some numbers to get a rough ballpark estimate.  Before quoting these exact numbers, I would reemphasize the word rough.

Pension reform advocates have posted the names and pension payments of the 98 Stockton retirees receiving over $100,000 on the web.  In FY 2012, those 98 folks received $12.2 million in benefits from CalPers.  If they were capped at $100,000 each, they would have received $9.8 million from CalPers, reducing CalPers payments by $2.4 million.

I looked up the City's CalPers actuarial reports for FY 2011 (most recent available).  CalPers made a total of $66.3 million in benefit payments to the City's retirees that year.  If there had been a $100,000 cap in effect, that total would have been reduced to about $64 million or only about 3.6%.

But that $2.4 million in benefit reductions should not be confused as an annual savings to the Stockton budget, as CalPers is not a pay as you go system like the discontinued retiree health benefit.  CalPers is making these payments from their investment portfolio.  Saving that $2.4 million payment, and a similar amount in subsequent years, would reduce the City's liability to CalPers which would then translate into lower CalPers contributions from the City.  But the annual savings to the City budget, would be substantially less than $2.4 million, probably no more than half that amount.

So the tax plan opponents have only offered up about $1-2 million in annual savings from this measure, less than 1% of the City's general fund spending.  (Yes, the City needs to find all the savings it can, but the benefits of this action shouldn't be overstated.) 

What would it cost for the City to gain that savings?

The City would have to change its approach to bankruptcy and take on CalPers to reduce pension benefits, and thus invite the precedent setting case that would pit federal bankruptcy laws against state law protecting pensions.  The outcome of that effort would be uncertain, the City could lose.  The only two certain outcomes is that Stockton would end up paying millions of dollars more for lawyers, and that the City would be stuck in bankruptcy for a much longer time.  Even if Stockton prevailed in an effort to cap pensions, it isn't clear that City would have gained much more than it spent in legal costs and time. 

Thus, I see the proposal that the City should try to cap pensions through bankruptcy as a feel good measure that would cost the city more in the short-run than it saves, and may not even accomplish much net savings in the long-run.  The main beneficiary of the City's efforts would be other cities who might benefit from the precedent if Stockton succeeded.  But a City in bankruptcy needs to focus on how to solve its own problems.

Stockton's pension reformers should team up with other like minded people around the state to try to change state law.  For example, the San Jose mayor is working on a statewide initiative that would give Stockton and other cities new powers to adjust pensions.  They should put their energies towards those reforms, and then press Stockton to take advantage of it if they succeed.

For Stockton right now, that energy can best be directed at making sure new employee contracts that will soon be negotiated are sustainable in the long-term.  Pensions are a burden, but they are only part of an overall compensation package, and pension reform is only one way for a City to control its costs of delivering services.