Isolated Conveyance Tunnel Debt Service $1.1 billion annually

The BDCP finally posted chapter 8 on financing.  This is the most important sentence regarding the estimated cost of the revenue bonds the state and federal water contractors would use for the proposed tunnel (page 8-88).

The annual debt service would average approximately $1.1 billion from 2021 through 2055.

This is much higher than the working number of $670 million per year that has been out there for the past year or two.  (see this MWD presentation for an example)  Why is it higher? The capital costs haven't gone up, they are still using $12.7 billion for a tunnel rather than the $14 billion suggested in a recent Sacramento Bee article.  The difference is they are now using more realistic financing terms.

The preliminary estimates had assumed 50 year financing at 5%.  It is very unlikely that there would be a market for a 50 year revenue bond for a risky project at those rates.  

The new estimates assume 40 year revenue bonds issued in 4 stages throughout construction.  It estimates an interest rate a little over 6%, and that 1-2 years of the initial interest would be capitalized to reduce repayment burden during the construction period.  I think that is a far more realistic financing assumption.

Given that the incremental water supply being discussed by the conveyance is 0.3 maf to 1.5 maf requested by the water contractors.  That comes out to between $3600 and $730 per acre foot of new supply - not counting operations costs - just to get the new water to the Tracy pumps.  Add a few hundred dollars more for operating costs and pumping to Los Angeles.  [I deleted a confusing sentence here from the original post and updated below.] 

Is it any wonder that south Valley agricultural interests prefer the Nunes bill to the BDCP?  Even desal sounds cheap by comparison to new BDCP water, and it is more reliable.  

There is a lot of hullabaloo about benefit-cost analysis vs. financial feasibility analysis at the moment.  The debate may be moot, because I can't see how the conveyance can clear the financial feasibility bar with these numbers.

Update 3/1: This afternoon I am told BDCP said 5.9 maf of exports which implies more incremental supplies than my initial interpretation of the EIR above. Perhaps I misread the EIR. I will try to confirm this and update in the future.

Update 2:  I now see the 5.9 maf in the BDCP documents, and 1.2 maf in incremental supplies.  With an $84m annual cost for operations and maintenance bringing the $1.1b in debt service up to about $1.2b per year, the 1.2 maf would be about $1,000/af

However, the EIR and  BDCP discuss alternative operations with lower exports that could be required to meet environmental goals.  It looks like this would cut the level of additional water exports to an increase of .558 maf, that would be about $2,000/af. 

The different scenarios and the volume of documents may take a while to sort out definitively, so these per af costs should definitely be interpreted as a preliminary impression.

Update 3:  And to be fair, I should point out that the project will presumably continue to provide incremental new water supplies for the exporters after the 40 year bond repayment period is over.  Thus, the cost over the entire life-cycle per af would be somewhat lower.  It will be good to see more accurate, formal analysis of these issues that should be available in the coming months.

Stockton's Possible Bankruptcy

The financial situation of the City of Stockton and its impact on its citizens is very sad.  As Mr. Deis said, there is no single cause of the situation, a severe economic recession, extremely generous employee/retiree compensation and benefits, a string of risky and/or poor decisions with bond financed investments by city leaders.  With more prudent decisions, the economy would still have created severe financial trouble and severe budget cutting for the city, but it is these bad decisions that have pushed it to the brink of bankruptcy.

I just finished reading the City Manager's budget update as well as the consulting report.  The City Manager is indeed proposing severe actions just to make it through the end of this fiscal year.  It's awful, but I don't have a better plan to suggest.  The most newsworthy of these actions is the plan to suspend payment on a few of its bonds.

The most significant missed payment will be on the $40m 2007 bond that financed what was seen at the time as one of the cities' shrewdest investments: the purchase of the Washington Mutual building to serve as a new city hall. 
The Washington Mutual building was hailed as a bargain, much cheaper than building a new building, but today it sits mostly vacant and the city hasn't had free cash to pay for the move.  In 2007, foreclosures were a new crisis and the residential market had just started a nosedive with the broader economy soon to follow, but tax revenues had not yet started to plummet.

Here is an excerpt from an old column from Mike Fitzgerald at the time of the 2007 deal for the vacant city hall upon which the city is about to default.  This is not to pick on Mr. Fitzgerald or play Monday morning quarterback.  His column is a window on the general sentiment at the time and is an interesting time capsule given the imminent default.  This occurred around the time I came to Stockton to interview for a job, and I remember this story because I was just starting to read the local news and learn about the City, and I was also following the financial vultures circling an increasingly desperate Washingotn Mutual.

Stockton leaders hit home run
By Michael Fitzgerald
Record Columnist

October 05, 2007

It seemed Stockton's current leaders, for all their talents, could not make the big play. But the purchase of Washington Mutual's building for a new City Hall - well, a soccer announcer would yell, "Goooooooaaaaaalllllll!"

The City Council this week approved the $35 million purchase of WaMu's classy eight-story office building, saying the old City Hall was cramped and leaky.

Leaders crowed the purchase is a bargain. Constructing a new building would have cost twice that much. At least.

I ran the deal past Mahala Burns, administrator and broker of Cort Cos., which deals in downtown real estate.

"It looks like a fabulous deal to me," Burns raved. "The parking is a huge asset, the location is fabulous, the building is in mint condition. We would expect a building like that to go for $48 million."

By way of comparison, San Joaquin County government, spending $109 million for its new administration building, gets 250,000 square feet and 38 parking spaces.

The city, spending $74 million less, gets 211,000 square feet and 518 (underground) parking spaces.

Looks like the county missed a bargain. Look for the blue light next time, guys.

Seriously, the benefits of the deal go beyond price.

Currently, City Hall stands on downtown's edge. The relocation surrounds it with banks and businesses, placing it in a true city center.

Though WaMu is selling, it intends to keep some workers in the building; the city, as landlord, is in a position to encourage this major employer to stay.

City jobs are not only higher-paying but more stable. The lending crisis may thin WaMu's ranks, but City Hall's staff will, if anything, grow as the city does.

Finally, departments such as the permit center and Parks and Recreation draw hundreds downtown. By one estimate, the building's foot traffic will double.

Realtors Don't Like Bulk Foreclosure Sales Either

Today, the president of the California Association of Realtors, published an op-ed in the Sacramento Bee arguing against bulk sale of foreclosure homes to investors.  This is something I raised concerns about when it was first proposed in August 2011, and I have been surprised there has not been more debate about the plan.

It isn't that often that I agree on policy with Realtor Associations, but I do on this one - at least until I can see a stronger argument for the social and economic gain from the government facillitating the sale of discounted residential real estate to hedge funds. 

Of course, the Realtors' motives are at least partially self-serving, no commissions for them on these bulk REO sales.  That may be part of the governments argument for doing this, increasing loss recovery by reducing transactions costs.

Stockton drops from #1 to #11 on the Forbes Misery List

Forbes' followed one of my suggestions from last year for adjusting their misery ranking, adding property taxes and removing sales taxes.  Unfortunately, they didn't follow my top suggestion, adding a measure of income.

Nevertheless, Stockton dropped from #1 to #11, in large part due to this one change.  Notably, all of the California metro areas dropped significantly in the rankings due to this adjustment; except Sacramento (which is getting pummeled in the rankings by the futility of the Kings).  While I approve of the change, they are using property tax rate, as opposed to property tax burden which would be an even better measure in my mind.  That kills places like Detroit with very low property values where the property tax rates may be very high even if the property tax bill is not.

Interestingly, the top 2 cities on this years misery list (Miami and Detroit), are identical to the top 2 on our adjusted misery list last year.

Economic Benefit-Cost Analysis vs. Financial Feasibility Analysis: Clear definitions needed for BDCP discussions

As an economist, it was painful to sit at the Delta Protection Commission meeting last week and listen to Jerry Meral's five minute answer to a question about benefit-cost analysis and the BDCP.  My understanding is that there have been similar exchanges at various meetings.  The problem isn't just his answer, the questions are often unclear, and even Allison Huber's failed bill wasn't very clear about the analysis she wanted the LAO to do.

To keep these conversations simple in the future, I recommend the question be phrased in the future as a simple yes/no question that relies on the Department of Water Resources' Economic Analysis Guidebook for definition of the terms.  It's not the only source for this, but it is pretty good, and it should be acceptable to Dr. Meral and the Resources Agency since it is their guidebook.

The guidebook is clear about the key difference in benefit-cost analysis and financial feasibility analysis.  The key definitions from the executive summary are:

Benefit-cost analysis determines whether the direct social benefits of a proposed project or plan outweigh its social costs over the analysis period. Such a comparison can be displayed as either the quotient of benefits divided by costs (the benefit/cost ratio), the difference between benefits and costs (net benefits), or both. A project is economically justified if the present value of its benefits exceeds the present value of its costs over the life of the project. (page ix)

Financial Analysis. The objective of financial analysis is to determine financial feasibility (that is, whether someone is willing to pay for a project and has the capability to raise the necessary funds). A financial analysis answers questions such as, Who benefits from a project? Who will repay the project costs, and are they able to meet repayment obligations? Will the beneficiaries be financially better off compared to what they will be obligated to pay? (page xii)

The test of financial feasibility is passed if (a) beneficiaries are able to pay reimbursable costs for project outputs over the project’s repayment period, (b) sufficient capital is authorized and available to finance construction to completion, and (c) estimated revenues are sufficient to cover allocated costs over the repayment period. (page xii)

Here is my interpretation of the exchange between Larry Ruhstaller and Jerry Meral about benefit-cost analysis if it had been asked and answered clearly.

LR: Are you doing a benefit-cost analysis of the BDCP or any of its elements as defined by the DWR Economic Analysis Guidebook?  Are you doing a financial feasibility analysis?

JM: No, we are not doing benefit-cost analysis. Yes, we are doing a financial feasibility analysis of the isolated conveyance.

I am pretty sure that I have translated Dr. Meral's answer correctly in terms of these definitions, but it would be helpful to get a simple yes/no question and response to this in the future.  And if you are involved in these financing and policy discussions, please learn these terms and do not use them interchangeably.

Economic Sustainability Plan Update

It's done.  You can download the executive summary (18 pages), the full report (almost 300 pages), or follow this link to a webpage where you can download individual chapters of interest, and find links to appendices, comment letters, and other ancillary material.

If you are interested in the Delta and you haven't looked at the Economic Sustainability Plan (ESP) yet - or haven't looked since an early rough draft - I recommend you at least check out the executive summary.  Even if you don't agree with the recommendations, you should find the ESP to be a very reliable source of information.  That information may change the way you think about the Delta, so don't read the recommendations first thinking that you know all there is to know about the Delta.  The things I have learned have certainly changed my thinking about a few issues.

By my count we have been through 4 drafts, made presentations and received comments at 15 long public meetings of various types, a formal public peer review by 5 national experts, and lots of correspondence.  The short time frame and open, public process was exhausting, but it did result in a better final product.   The report is done, but there will be a few more presentations, most notably to the Delta Stewardship Council on February 8-9.