Monday, August 24, 2020

New $15.9 bil. Delta tunnel cost estimate: Revisiting DWR's 2018 single-tunnel economic analysis with updated costs shows it is a bad investment for water agencies.

As reported in the Sacramento Bee, the cost of a single-tunnel Delta conveyance is now estimated at $15.9 billion.  In a previous 2018 analysis to support a short-lived proposal to stage the twin-tunnel WaterFix proposal, DWR estimated the single-tunnel 1st stage of WaterFix at $11.1 billion in 2017 dollars, which is equivalent to $11.7 billion in 2020 dollars.  This is a 35% increase in constant dollars, and should lead the Governor and the dwindling number of water agencies that still support the single-tunnel delta conveyance facility (DCF) to reevaluate the investment.

That 2018 analysis wildly overstated the economic benefits of a single-tunnel to participating water agencies, but for now let's accept their estimate of benefits.  The image below shows the results of that analysis (Table 5, with no federal subsidy).

Simply updating the costs to this latest estimate ($15.9 billion in 2020 dollars is equivalent to $15 billion in the 2017$) reduces the benefit-cost ratio for SWP urban agencies from 1.23 to 0.92, and for agricultural agencies from 1.17 to 0.87 in the trading scenario.

That's a bad investment, but it is actually much worse than that.  The 2018 analysis assumed the project would be operational in 13 years, whereas the new cost estimates a 20 year delivery period.  I didn't incorporate the extra 7 year wait for benefits in the above recalculations of the b-c ratio, but it would make it even lower.

At some point, we might see a revised economic analysis that manufactures new benefits to magically get the benefit-cost ratio over 1.  Readers of this blog know that DWR and MWD already have an established track record of inventing new benefits as new information reveals the delta tunnel(s) to be a worse and worse investment.  

P.S.  Thanks to Restore the Delta for archiving the 2018 analysis online for the public record.  DWR has wiped their previous links, and I couldn't find a saved copy in my files.   

Sunday, August 23, 2020

Water Blueprint proposes a valley wide sales tax to fund their irrigation water plan. Is it equitable? Is it feasible?

 Earlier this month, CSU-Fresno hosted the event "Funding Water Infrastructure in the San Joaquin Valley." The vast majority of the event was focused on the so-called "Water Blueprint for the San Joaquin Valley," a high profile new investment plan for irrigation water.

At the event, the Blueprint rolled out a proposed funding plan - the centerpiece of which is a proposed 0.5% special sales tax in the 8 counties of the San Joaquin Valley.  While the sales tax would provide the vast majority of funding for the Blueprint's multi-billion investment strategy, the funding plan also includes a modest $4 per acre foot charge on water users and hoped for matching funds from the state and federal government.  In most years, the Blueprint projects the sales tax would generate 7 times more revenue than water user fees. 

The sales tax is a bold new idea in water finance, but not a good one as proposed.  It is inequitable across geography and income.  It probably isn't politically feasible either, despite the optimistic spin from a new poll presented at the event.  Below, I briefly discuss these issues and suggest some changes to the Water Blueprint to improve the equity and political prospects of their proposal.

Geographical Inequity - Taxes North San Joaquin Valley Counties Without Benefit

The tax is proposed for 8 counties, although the Blueprint plan only provides benefits to 5 counties from Madera south to Kern. The proposal would get 1/3 of its revenue from the North San Joaquin Valley counties while providing zero benefits to them - and potentially harm San Joaquin County's Delta region.

The Blueprint can correct this problem by dropping the 3 northern counties from their proposal, and leaders in the North San Joaquin Valley should demand that they do so.

I have argued for years that San Joaquin, Stanislaus, and Merced counties are ill-served by the 8-county region often used in state planning efforts.  The Blueprint, which has gained some influence with state leaders, is an excellent example of this problem.

Geographical Inequity - Benefits Wealthy Out-of-Valley Landowners 

In a previous post, I have pointed out that the biggest beneficiaries of the Blueprint agenda are farm owners, not poor farmworkers as much of the Blueprint PR claims.  Many of those farm owners, especially the wealthiest ones, live in wealthy communities far from the Valley.  These individuals can afford to pay for their own water infrastructure, and certainly shouldn't be subsidized by a sales tax imposed on the Valley's cash-strapped households.

The Blueprint can fix this adjusting their financial plan such that user fees are charged at full cost. The sales tax revenue would be used to provide water rate assistance to water users who live within 50 miles of their farm.  Income and acreage limits on the recipients of the sales tax funded water rate assistance should also be considered.

Inequity Across Industries - Agriculture Is Exempt From Sales Tax, But Other Industries Pay

There are many exemptions to sales tax, most notably to services and food.  Farming inputs and supplies are also exempt from sales tax, whereas most non-agricultural businesses in the Valley pay sales taxes.  It is bold for the Blueprint to propose a special sales tax benefit for an industry that already has an exemption from paying sales tax.

Income Inequity - Regressive Sales Tax Primarily Benefits Well-Off Landowners

The primary general argument against sales taxes are that they are regressive.  Lower-income households pay a higher share of their income in sales taxes than higher-income households.  The situation is the same here, and it is particularly problematic in this case as the largest beneficiary of the tax are the owners of farms - who generally have above average incomes in the Valley and include some truly rich out-of-Valley landowners as described above.

The Blueprint can improve this inequity by including funding to repair unsafe drinking water systems in the Valley to their plan.  The tax is still regressive, but funding clean drinking water with its proceeds will at least direct more of the benefits to low-income communities.

Political Feasibility - Will it Pass?

The Valley is not an easy place to get voter approval for a tax increase.  And as a special tax, I believe the Blueprint proposal would require a 2/3 vote to pass.  That's a tough hurdle, and the poll results are interesting if reliable.

First, while the poll focused on the sales tax proposal - in the one question that presented both a "water consumption tax surcharge based on use" and a "special sales tax" - respondents favored the use charge over the sales tax by a nearly 2-to-1 margin.  My read on this is that a proposal as I suggested above - user charges to cover the full cost with special tax revenue to defray costs to local users meeting residency, income and acreage restrictions - would be seen as more equitable and popular to Valley voters.

Second, the poll had a note of positive news for the sales tax: 69% of the respondents said they would be "very likely" or "somewhat likely" to support a special sales tax for water.  Is this poll reliable?  Is there really that much support?  A look at the last voter poll the Institute for Leadership and Public Policy did in cooperation with Valley water users suggests there polling may be too optimistic.

In October 2018, a few weeks before the vote on the Proposition 3 water bond, the same group released a poll of likely voters in the 8 San Joaquin Valley counties that found the following support for Prop 3. 64% Yes, 10% No, and 26% Don't Know.  In reality, 50.1% of voters in the 8 counties voted No, so their polling of Valley voters missed by an enormous margin in 2018.

Below are the results by County as reported by the Secretary of State.  Prop 3 results

Yes

No

Fresno

129569

112144

Kern

91337

106127

Kings

15223

14134

Madera

17170

20340

Merced

31410

26158

San Joaquin

90069

97266

Stanislaus

71858

78843

Tulare

49794

44293

Total

496430

499305

49.9%

50.1%

I believe the Blueprint's special sales tax will lose big as proposed.  It might have a chance if the Blueprint adjust it to be more equitable in the following ways.

  • Eliminate the 3 North San Joaquin Valley counties.
  • Add funding for safe drinking water in disadvantaged communities.
  • Propose a full cost user charge with the sales tax to defray expenses for non-wealthy water users who live in the Valley.