Friday, October 19, 2012

A better definition of co-equal goals

In an announcement of proposed revisions to federal water resources planning guidelines, the Federal Government describes co-equal goals
Achieving Co-Equal Goals: The Administration's proposal reiterates that federal water resources planning and development should both protect and restore the environment and improve the economic well-being of the nation for present and future generations.
In many ways, the proposed revisions to Federal guidelines are similar in its goals to California's 2009 water legislation. But there are some key differences. As of 2009, the State of California defines co-equal goals in the following way.
'Coequal goals' means the two goals of providing a more reliable water supply for California and protecting, restoring, and enhancing the Delta ecosystem.
In both cases, the concept of co-equal goals is used to elevate environmental considerations to be equally important as economic considerations. But the California law limits itself to one narrow economic consideration, water supply reliability, and there continues to be confusion over what exactly "reliability" means.

Yes, I realize that California's 'coequal goals' is followed by this statement,
The coequal goals shall be achieved in a manner that protects and enhances the unique cultural, recreational, natural resource, and agricultural values of the Delta as an evolving place.
That adds a few additional economic considerations, but the economic concerns in the Delta are a lot bigger than Delta Ag and recreation. Even when it comes to Delta ag and recreation, some emphasize the importance of the words "unique" and "evolving" to severely restrict their consideration.  The issue goes well beyond a lack of proper consideration for the Delta and regional economy, but a completely inadequate consideration of costs and impacts on taxpayers and ratepayers across the state through the continuing neglect of economics and finance.

The elevation of water supply reliability over other economic considerations makes California's definition of co-equal appear discriminatory and arbitrary when compared to "economic well-being of the nation for present and future generations" in the federal language.  I doubt it is discriminatory in a 14th amendment way, but I can see no compelling reason for the state to elevate the importance of water supply reliability among all economic concerns and I doubt that was the legislature's intent.  The use of a more inclusive term "economic well-being" would still allow for full and fair consideration of water supply reliability in formulating Delta plans.  I actually think it would make it easier for the agencies who have to make Delta plans and implement them since there are accepted methods and definitions that can be used for evaluating "economic well-being".

If I were in the California Assembly, I would introduce the Co-Equal Goal redefinition act to make California's co-equal goals more consistent with this federal language.  It would simply revise the definition to the following...
'Coequal goals' means the two goals of improving the economic well-being of California for present and future generations, and protecting, restoring, and enhancing the Delta ecosystem.

Thursday, October 18, 2012

ACWA denounces other people's bumper sticker slogans

In light of yesterday's ACWA blog denouncing bumper sticker slogans, I feel compelled to repost one of my favorite photos from the media circus preceeding the 2009 water legislation that ACWA championed (which one could argue made a bumper sticker slogan the law).  This shot is from ACWA's 2009 "water march" to the Capitol in summer 2009.

The anti-bumper sticker ACWA blog post also contains two of my favorite over-simplified bumper sticker slogans from peripheral tunnel promotors, "One State" and the "Delta Fix". 

To be fair, I think the ACWA message has improved a lot since 2009.  They even invited me to be on a panel at their December conference even though I make a habit of needling them on this blog. 

But if ACWA is serious about this "One State" stuff, there is a lot they could do to lead by example.  They should start by endorsing Rep. Garamendi's safe levee and benefit-cost bill. 

What could be more "one state" than making the Central Valley Project support the levees that have conveyed their water for 50 years (no more free riding).  What could be more "one state" than a comprehensive, statewide benefit-cost analysis of the "Delta Fix".  Instead of opposing the Berryhill statewide benefit-cost bill of the peripheral tunnels in the Assembly, "one state" ACWA should be promoting it.

Thursday, October 4, 2012

Stockton City Manager Makes His Case in the WSJ

Bob Deis made the city's case for cutting payments to bondholders through Bankruptcy in the Wall Street Journal last Friday.  I agreed with him through the first 2/3 of the piece.  Creditors do bear some responsibility for the City's fiscal woes, and the City has cut services to a dangerously low level.  The city has a primary responsibility to provide basic services to its citizens today, especially in the midst of a rapid spike in crime. 

But Mr. Deis starts to lose me, and I suspect most WSJ readers towards the end of the piece when he argues that they couldn't cut employee compensation or CalPers, because the city has been losing police officers and needs to stay competitive.   

I am not convinced that the turnover in police is completely due to recent compensation cuts, other cities have made similar percentage reductions so I don't think the Stockton's relative compensation and benefits has diminshed significantly.  I suspect it has more to do with bad morale from the nasty fighting between the city and the union over the past 3 years, the fact that the job has gotten tougher with a diminshed force and increasing crime, and the anticipation of more serious compensation/pension cuts being imposed through bankruptcy.  Officers may correctly view more cuts as inevitable in the long-run despite the City's recent efforts to hold the compensation line in its short-term pendency budget and initial ask to creditors. 

The city is hiring a lot of new officers right now, and my concern is that the city may still be making promises it can't keep to recruit them.  This is an opportunity to remake the force with officers who understand what the city can truly afford to pay in the long-run and are committed to making a difference in the City and contributing to a turnaround.  But this easy for an academic like me or a bond insurer executive in a corporate office to say when the reality is that Stockton has an emergency need to hire more police now (actually months ago), not in the future after new compensation and recruiting plans can be developed and implemented.  I believe that quality police officers can be hired and trained for sustainable levels of compensation, but it will take longer to find and train them, and the transition will be inevitably messy.  Unfortunately, the criminals aren't waiting.  I am not sure of the solution to this very tough problem.  The City may need some non-financial help providing services through the transition.

The other question is why isn't the City going after CalPers?  I agree with Stockton's choice to target retiree healthcare benefits instead of pensions.  I also think there is a case to further reduce compensation (which also reduces future pension liabilities) before going after CalPers.  After all, bankruptcy is about restructuring debt and postponing payments to creditors - and the root problem with CalPers is that the contributions are too small for the promised benefits.  A letter to the editor in the WSJ yesterday makes the point,

Mr. Deis says that pension benefits cannot be cut during bankruptcy because that would lead to an exodus of police officers and senior management. But perhaps the real reason that Stockton has chosen not to cut pensions is that, ironically, it cannot afford to. That's because cutting would trigger a takeover of pension obligations by the California Public Employees' Retirement System (Calpers) and, under California law, Stockton would be required to pay Calpers a lump sum to cover unfunded liabilities. The kicker is, those liabilities would get repriced at a 3.8% discount rate, instead of the 7.5% discount rate that Calpers normally uses for pricing liabilities. So Stockton, already struggling with what it perceives to be hundreds of millions of dollars of unfunded pension liabilities, would face a demand by Calpers for a much larger amount if it tries to cut pensions.

In other words, Stockton is trapped in Calpers's game of kick the can down the road. Stay in the game, and it gets to use Calpers's rosy investment assumptions to underfund its pension obligations, passing the true cost to future generations. Quit the game, and it's stuck paying the true cost now.

Michael J. Sabin
Sunnyvale, Calif.

Tuesday, October 2, 2012

Public Agency Fixed Cost Death Spiral: Sacramento Airport Edition

I have been busy making travel plans for myself and family members lately, and I am extremely annoyed at the cost of flights and poor connections out of the Sacramento airport.  I am increasingly finding flights from the Bay Area to be substantially less expensive with better connections.

I strongly suspect that this is at least partially to blame on the outrageously expensive $1 billion Terminal B replacement, and the resulting hike in airline lease rates, parking rates and other costs.  Before they started building the project, the airlines begged the Sacramento Airport Authority to consider less expensive alternatives before embarking on their grand plans, but were ignored.

The bond payments for Terminal B are finally starting to kick in, and the Sacramento Airport authority could be in significant financial trouble in a few years if they aren't able to increase traffic.  Since 2008, the airline terminal rental rates at the Sacramento Airport have more than doubled, and annual debt service costs have increased from about $20 million to $80 million.

With Frontier Airlines announcing they are pulling out of Sacramento at the end of the year, the job just got tougher, and airline fares will probably go higher now that Southwest is losing a low-cost competitor in the market.

Data from the Sacramento Airport bears out the problem.  Since the airport rates were jacked up to pay for the new terminal in 2008, passenger traffic at the Sacramento airport has declined 17.5%, compared to 1.7% decline nationwide over the same period.  Undoubtedly, the recession is partly to blame, but I suspect they are losing traffic to other airports as well, and there is no sign of a significant bump in traffic from the new Terminal.

Of course, none of this stopped the Sacramento Airport Authority from receiving tons of awards, including economic development awards from various local groups who rave about the pretty new terminal.  This makes me wonder whether economic development awards for people running public agencies are bad for economic development.  It just encourages them to build costly monuments and take on excessive debt for the next generation.

What would really help economic development is not a pretty gateway, but more flights at lower costs.  While Terminal B was outdated and needed to be replaced, it could have been done with a similar facility as Terminal A for a fraction of the cost.

By increasing rates a few years ahead of the increase in debt service, the airport has built up some financial reserves.  I wouldn't expect any serious financial issues for several years, and the airport authority will probably squeak by, although the citizens of the region will endure lousy schedules and higher fares.

Maybe Frontier Airlines will come to Stockton to join ultra-low cost Allegiant.

Monday, October 1, 2012

Urban Water Agency Op-eds Follow the Same Script

For the past two months, there has been a steady flow of op-eds from urban water agency leaders that follow roughly the same script. This one from San Bernadino caught my eye this morning and is typical.

It piles the fragile levees argument on extra thick, but at least spares us the "one state" line that appears in most of them. But what really gets my attention is that they are all giving very consistent numbers for the ratepayer costs.
 Construction of the new conveyance system is expected to be under way by 2017 at a cost of $12 billion to $14 billion, with another $9 billion needed for eco-system restoration. That amounts to a cost of $1 per person or about $4 to $5 per household per month over the anticipated life of the project.
The simple math, 25 million people times $1 month ($12 year) is $300 million per year, maybe $400 million factoring in some population growth and rounding up. This is compared to the estimated annual debt service and operating costs of the facility is $1.2 billion. That means that the urban agencies expect the portion of the state's agriculture industry that uses Delta water to pay $800-$900 million annually.  Is that affordable or in the best economic interests of agriculture?  I highly doubt it.

The urban water agencies are being dishonest with their ratepayers in multiple ways:

1. They aren't telling their customers that they are counting on agriculture to finance the vast majority of the conveyance project, and that there are serious risks for their water rates and/or taxes in the very probable case that agriculture can't pay that much.

2. They are leaving out the "$9 billion" ecosystem cost that will also be largely paid for by their ratepayers, although through their taxes not their water rates. They should say the plan also depends on $9 billion in ecosystem costs paid for with their tax dollars, crowding out investments in local schools, health and welfare programs, or requiring a general tax increase.  Divide that $9 billion by roughly 40 million Californians and you get $225 per capita, about $700 per household.

3. They say nothing about alternatives and comparative costs.  There is a strong case that a combination of Delta levee upgrades, local water supplies, conservation and recycling will be less expensive, more resilient to droughts (the biggest reliability threat), save lives and protect critical statewide transportation and energy infrastructure, and create jobs across the state, including southern California.