Is this headline in California's future?

$9 billion project now tunnel to nowhere
New Jersey governor says state too broke 

Trenton, N.J. (AP) - The biggest public works project in the U.S. - a $9 billion-plus train tunnel connecting New Jersey and New York City - is dead in its tracks...
It also leaves New Jersey with nothing but a $600 million hole in the side of the hill.

(headline on page 6 of today's Stockton Record, no link available)

The obvious comparison is the $10+ billion Delta water supply tunnel envisioned in the deceptively titled Bay Delta Conservation Plan (BDCP) that still doesn't have a credible financing plan or economic analysis to justify the cost. 

Governor Christie is much admired by Meg Whitman and was out here campaigning for her.  He is also discussed as a potential Republican nominee for President.  California (both its government and its households) is a lot more "broke" than New Jersey, and has a weaker economic outlook.

The apparant refusal of BDCP to even analyze lower cost alternatives, including but not limited to a smaller tunnel, is simply bad government.  [Afternoon update: I am encouraged that the new FAQs posted by the BDCP state clearly that they in fact are evaluating, smaller tunnel options.  I had heard otherwise, but perhaps that is just what certain interest groups are urging them to do.]

Unemployment Friday

Another month passes, at California unemployment is still stuck at 12.4%.  As reported earlier this week in our new forecast, we now expect unemployment to remain at or above 12% through the first half of 2011, and not drop below 10% until the end of 2013.  Yes, that is more than 3 years from now.  At 13.808 million, California payroll jobs reached a new low for this cycle, and is now 250,000 jobs below where we were when the recession "officially ended" in June 2009, and 1.4 million below the 2007 peak.  Most losses are now in local governments and schools, although construction also has yet to end its 4 year slide.

The bright spot continues to be San Jose, the only place in Northern California that is clearly in recovery mode.  It is being totally driven by the bounce back in the computer/tech sector, with both computer manufacturing and computer system design jobs up 5% over a year ago.  Temp. employment services (likely related to the computer bus.) and private universities are also posting strong numbers.  With unemployment in San Jose still topping 11%, it will be a while before their renewed growth starts spilling over to the rest of the region in a big way.

San Francisco also posted its first solid monthly report since I can remember.  SF has been the biggest disapointment through the first year of recovery, as I had expected it to show a pattern more like San Jose.  Scientific and professional services in the San Francisco area are finally showing the gains we have been anticipating.  Don't get too excited, SF only gained 1,000 jobs back this month, and is still way down from a year ago.  It will take more than one good report to clearly show a new trend.

It is in the Valley where the reports turn uglier, and it isn't surprising given the dependence of these areas on government and construction, and the relative absence of technology, R&D, and other areas fueling growth.  Sacramento and Stockton took another significant step back this week, and unemployment rates across the Central Valley are all over a full percentage point above last year's level.

Delta Stewardship Council Should Ignore the Water Contractors' Protest Against the Environmental Water Caucus

I just read the letter the state and federal water contractors wrote to the Delta Stewardship Council urging them to ignore the Environmental Water Caucus (EWC).  I found the second sentence in the letter especially interesting, and completely misleading.

There is no need for the Council to revisit that which was reviewed by the Delta Vision process and has been evaluated carefully by credible independent analysts in recent years... (note: the analysts they refer to repeatedly in their letter is the PPIC and the 2008 Comparing Futures report)

Much has changed, and there are an abundance of good reasons to revisit these old reports.

1.  No one was talking about tunnels in either Delta Vision or PPIC, and the estimated costs of building the alternative conveyance have roughly doubled since these reports were done. 

2.  Those reports did not evaluate the type of proposal EWC is making.  In particular, PPIC compared a scenario of No Exports (with wildly exagerrated costs from water shortages) to a large surface canal.  There was no evaluation of a small tunnel vs. a large tunnel as many reasonable and credible people are now suggesting.  And even the BDCP "discussion document" says the loss in water exports if we do not build alternative conveyance in 2050 is about 1.5 maf, not the worst case, disaster scenario of 0 exports (-6 maf) modeled by the PPIC.  PPIC did not account for water conservation or anything close to what is being discussed by EWC or BDCP.

I should also note an unsubstantiated claim in the contractors' letter about the economic contribution of westside farmland.  "These lands develop about $12 billion in economic value for California annually." 

Really?  I challenge the water contractors to provide a reference for that ridiculous claim.  $12 billion is 3 times the entire GDP of Kings County ($4 billion of which $1.5 billion, 38%, is government/military spending.  For comparison, the GDP of Sacramento is only 23% govt/military).  Maybe they shouldn't be so quick to point out when people ignore gross vs. net water conservation when they are triple and quadruple counting dollars, and failing to differentiate between revenue/output and value/income.
 
Finally, do they have any references other than the 2008 PPIC report?  As noted above, the PPIC did not analyze $10+ billion tunnels, or an alternative scenario that looks anything like the EWC vision.  Furthermore, the 2008 PPIC has plenty of its own exagerrations that tip their analysis in favor of a canal.  For example, I wouldn't call a report that completely leaves out the commercial value of the salmon fishery, and uses phony projections of the state's future population as "careful."  Regardless of its weaknesses, that report is severely outdated now, to the point of being irrelevant.  We have a lot of new information, the scenarios have changed, and I am willing to bet that even the PPIC folks would have a hard time arguing against the need for some substantially updated analysis after nearly 2.5 years of new developments.
  
In fairness to the PPIC people, it must be frustrating to be so selectively cited, and their report isn't all bad.  For example, the contractors don't mention that their recommendation of new conveyance also hinged on the contractors paying a lot more for Delta restoration than currently proposed in BDCP discussion documents, they recommend water exports even with a canal quite a bit lower than the contractors want, and a number of these researchers were involved in the Delta flow requirements report for the SWRCB that the contractors like to disparage as irrelevant.

(A few minor edits on 10/22)

New Economic Forecast Released

Like most forecasters, we have been busy marking down our outlook.  It's not pretty, especially in the Central Valley.  Summary pasted below.  Summary tables, more highlights and subscription information at this link. 

CALIFORNIA AND METRO FORECAST: October 2010


California Double Digit Unemployment Will Last Through 2013

Sacramento has the weakest 2011 outlook.

(Stockton, Calif.) October 21, 2010 – The faltering recovery will keep California’s unemployment rate above 10% for three more years according to the Business Forecasting Center at the University of the Pacific. This quarterly forecast is a significant downward revision in the 2011 and 2012 outlook, and reflects a slowing national economy.

In the Central Valley, which is disproportionately impacted by continued weakness in construction and state budget cuts, unemployment rates are projected to plateau at their current high levels for nearly two years. Homebuilding remains at record lows in the Valley, and cuts to schools and local governments are offsetting any gains from improved conditions in agriculture.

Sacramento has the weakest outlook for the next 12 months, with no job growth projected between 2010 and 2011. Sacramento unemployment will exceed the state average for 2011, the first time this has occurred in over two decades of consistent data. By 2013, Sacramento and Stockton will be leading a strong recovery in the Central Valley, but the next two years will be extremely challenging for the region.

San Jose continues to be the only area in Northern California that is clearly recovering. We project 3% job growth for San Jose in 2011 and 2012, and this strength will eventually spill over to its lagging neighbors. Unemployment in all the Bay Area metros should drop below 10% by the end of 2011.

State of Debt

The LAO reports on the $15 billion and climbing shortfall in the state's Unemployment Insurance Trust Fund.  The entire shortfall has accumulated since January 2009, and hundreds of millions of dollars in interest payments will soon become due.

In other cheery news, the Treasurer's Debt Affordability Report was released detailing the $89 billion in current taxpayer-backed debt with an additional $50 billion authorized but unissued to date.  The report also details "Yields on the State’s 30-year tax-exempt GO bonds ranged from a low of 4.82 percent to a high of 6.10 percent. Compared to AAA-rated tax-exempt GO interest rates, these translate to spreads of 87 to 172 basis points."  That means the state is paying about an extra 1% on its debt due to its lousy credit rating.  That's a lot of extra interest, that could be used for other purposes.  The report also details the state's debt burden is the 2nd highest in the country after New York.

Not to be outdone by their state government, California's households have proven themselves to be pretty adept at loading on their own debt.  The state may have the 2nd highest debt burden in the country (for now), but our private households have the highest per capita debt burden in the U.S. according to the Federal Reserve Bank of New York, $80,000 per capita compared to the U.S. average of about $50,000.(see page 18).

 

Does Jerry Brown's Water Plan Really Call For a Peripheral Canal?

This AP headline caught my attention this afternoon "Brown calls for delta canal in Calif. water plan".  The article states,

In a plan he released on his website, Brown endorsed building a canal or tunnel around the Sacramento-San Joaquin Delta... Brown previously has said California needs a better system to more efficiently move water, but the Democrat's water plan is his most explicit support of a canal or tunnel to help to deal with the state's current water troubles...

Oddly, the article includes no quotes from Brown or his campaign that clearly endorses a canal. So I went to his website to read the plan to see what it actually says.  The canal doesn't come up until the 5th bullet under point 5 of the 7 point plan.

5.  Protect and Restore the Delta....

• Complete scientific, economic and environmental review of alternative conveyance facilities recommended by the Bay Delta Conservation Plan

6. Invest in California's Water Infrastructure including water storage facilities

California desperately needs investment in its water infrastructure, but given the State's financial condition, we must ensure that investments are cost-effective and funded by the appropriate sources. The beneficiaries - or users - of water infrastructure projects should pay their share of the costs of those projects. The state should invest in infrastructure improvements providing benefits to the general public or the environment. The projects must be cost-effective and make long-term sense. As Governor, I will:

• Support infrastructure investments, including water storage projects, that achieve the multiple goals of increasing water supply reliability, protecting the environment and other public benefits, such as wetlands protection and restoration, and flood protection.
• Support conveyance and storage investments, such as a peripheral canal or tunnel, that provide a net benefit in ecosystem and water quality conditions and where the beneficiaries pay for the benefits they receive

It doesn't sound like very explicit support to me.  It sounds like he is calling for studies "a scientific, economic and environmental review of the BDCP", and offers conditional support if the canal passes some cost-effectiveness and beneficiary pays tests. 

Maybe I don't know the full story, but it looks to me like AP botched this story and misrepresented Brown's water plan.

Update 10/14: The front page of the Stockton Record ran the AP story today under the bold headline "Brown Supports Building Canal or Tunnel around the Delta."  No doubt that headline just cost him a few votes in Stockton.  I see no press release on the Brown website regarding the release of what the AP says is a "new" water plan.  Hopefully, the Brown campaign will clarify his position so people know exactly where he stands.

Update 2, 10/14:  It seems that most people think this is a clear endorsement.  I guess I don't understand how to read politicians' statements although Brown supposedly has a reputation for speaking clearly.  I still read this as weak conditional support, that could be withdrawn if the costs are too high and environmental benefits and safeguards are weak. 

How much should crop production decline during a drought?

According to the report I recently published with UC-Davis researchers, crop production in the San Joaquin Valley declined between 2.3% and 2.5% in the 3rd year of a extended drought in which water supplies declined by a much greater percentage.  I find the 2.5% decline to be a remarkably low number, half what most experts predicted, and the agriculture industry and water managers certainly deserve credit for their achievement in the face of adversity. 

Still, the conventional wisdom is that we have a terribly broken water system, especially for agriculture.  Would a truly broken and disfunctional system deliver such results?  To those who hold this view, I wonder how much would crop production have to decline in a drought for them to be satisfied with the water system.  Would -1% be good enough?  0%?

When the drought is over, agricultural production in the Valley will still be constrained by environmental pumping restrictions brought on by a collapse in fish populations.  The highest estimate I have seen of the impact of these pumping restrictions on Valley crop production is a 1% decline.  Is that too much to ask given the great environmental damage created by the pumps?  What is a reasonable expectation?  -0.3%?  0%?

Postscript (10/6):  I see that asking reasonable questions like this about Valley agriculture has been called waterboarding and generates comparisons to Nazi's these days.

Realtors' Economic Forecast

One expects, and typically receives, an optimistic assessment of the economy from the California Association of Realtors. Today's news release accompanying the new CAR housing market forecast contained the most optimistic statement I have seen about the California economy in a long time. According to CAR chief economist Leslie Appleton-Young,

We expect a net jobs increase of approximately 1.4 million jobs in California for the year to come ...

That has to be a misquote. A net gain of 1.4 million jobs would be roughly 10% growth. Surely, she means 140,000, we will see when the details are presented later this week.

More importantly, they are predicting a 2% gain in the median home price from 2010 to 2011 which is pretty modest for CAR and suggests the jobs quote is indeed a mistake. I expect median prices to be flat with some continued declines at the high end of the market that will not affect the median.