Delta Levee Innovations

Since working on the Economic Sustainability Plan with Dr. Pyke, I have been promoting "fat" seismically resistant levees for the Delta as a cost-effective solution to the Delta problem.  Now UC-Berkeley engineers are developing even more creative solutions for seismically resilient levees. 

Check out this new article from Innovations, the UC-B Engineering newsletter.

In the basement of Davis Hall, Hamed Hamedifar (Ph.D.’12 CEE) is rattling scale models of levees on a shake table, subjecting them to vibrations replicating the magnitude 6.9 El Centro earthquake of 1940. Hamedifar is designing a plate pile system, rectangular plates affixed to three-yard beams, to bolster the strength of levees in places like the California Delta...For one of his research projects, Hamedifar borrowed a technique of using plate piles to prevent landslides that was invented by Richard Short, a geoengineering lecturer at the college and Hamidifar’s mentor, and adapted it for embankments and levees. “It is a very reliable method—cost-effective, environmentally friendly and proven to work,” says Hamedifar...Hamedifar estimates that stabilizing levees with plate piles will save time and money...The average plate pile installation would require 10 days from permitting to finished product, and would cost less than $1 million...In repeated tests, levees with the plate piles showed no deformation post-shaking. Without the plate piles, the levees failed, dropping three to four feet. “It is an exact model of what we are doing but scaling it down for levees,” said Short. “There is a lot of science to scaling it down and doing those tests. The uniqueness is the seismic stability.”

$1 million per mile!  Wow, that suggests you could seismically reinforce the Delta levees for under $1 billion, even cheaper than the $2-4 billion we estimated in the DPC economic sustainability plan.

You would think DWR would be jumping for joy.  Maybe not.  Check out this passage from a UC-B alumni association blog on the same topic.

“Richard Short and I made presentations to both the California Department of Water Resources and the U.S. Army Corps of Engineers,” Hamedifar says. “We asked for feedback, but they had no complaints, couldn’t point out any flaws in the technology. But it was clear they weren’t interested—they were obviously determined to focus on another solution.” That kind of tunnel (or Twin Tunnels) vision probably won’t resolve the Delta’s dilemma, Hamedifar says.
“It’s always risky to push just one solution for an engineering problem like this, especially if the idea being pushed isn’t demonstrably better than other ideas,” he says. “It’s likely you’ll need a multitude of approaches, not just one. The Tunnels will involve huge fiscal and environmental costs, and they’ll take years to complete. Our approach is cheap and effective, and it can be done quickly. We think it at least deserves a fair hearing.”

Sounds familiar. 

Regardless of your preferred technology towards a more seismically resilient Delta (I still like the wide crown benefits of fat levees where there is room), it is worth mentioning yet again that seismic levee upgrades have not only lower costs than the tunnels, but higher benefits.  They will save lives!  And they will protect critical energy, transportation, and local water infrastructure.  They will protect property and agriculture.  And yes, they will also protect export water supplies from catastrophic failure. 

The state should be dedicating its resources to developing levee technology and alternative water supply technology, instead of the twin tunnels.  These technological solutions help everyone, and many have potential applications to solve problems around the world.

BDCP is a failure.  It's time for fresh thinking and innovation.

Friday News: Stockton to consider taxes for the November ballot, Kings are Sold, and Unemployment is down to 9%

I guess it is a good thing that the release of our next economic forecast was delayed until next week. I have a lot of editing ahead of me this weekend.

In what I thought could be a potentially newsworthy passage, I had written that the City should move forward now to put a general tax increase before voters in November, even if negotiations with the creditors are still on-going.  I had heard and thought that the City Manager and bankruptcy counsel felt that any request for a tax increase had to come later, after a plan of adjustment were approved.  I disagreed, and thought they should move ahead with taxes as soon as bankruptcy eligibility was confirmed, and voters could be assured that if they voted for taxes it wouldn't just be swallowed up by unsustainable employee contracts (the likely outcome if taxes were approved prior to 2012).  The Mayor pushing his competing Safe Streets tax initiative for the November ballot only increases the urgency.

Well, this afternoon the Stockton Record posted this.

Stockton's proposed budget includes call for tax hike

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By The Record

May 17, 2013 3:48 PM

STOCKTON — The city could ask voters as soon as November to raise taxes to pay back some debts suspended in bankruptcy and bolster Stockton's fight on crime.

 

I am happy to see this development, and even happier that it isn't appearing the day after the Record runs a story in which I suggest it. I would urge the Council to move ahead now with some sort of tax initiative. If the details about the bankruptcy plan of adjustment are still too murky to support a long-run general tax initiative, then they should offer a very short-run tax for public safety as a substitute or compromise with the Mayor's plan.

In Sacramento, the Kings prevailing with the NBA and the Maloofs quickly selling to the Sacramento group is another pleasant surprise. While there are some legitimate concerns with the arena deal, overall, this is another positive development.

And the California unemployment rate dropped all the way to 9% today. This was a good day. A great way to start the weekend. Time to open a bottle of wine.

[Some minor content and formatting edits were made Sunday upon rereading this mess. I confess I had already opened the wine when I wrote it.]

May Revise Budget Forecast

A lot of people are surprised at the pessimistic tone of the economic and revenue forecast in the revised budget released today.  I don't think the actual economic outlook has declined, it is just that the Governor is backing away from the relatively optimistic forecast they assumed for the January budget release.  Using a slightly optimistic forecast in January allowed them to declare that the 2013 budget was balanced with much fanfare in the local, state and national press about California's comeback and the Governor's success.

This is what I wrote in January when the Governor's original budget was released.

"People most often ask me about the economic and revenue forecast in the budget. I think it is a little optimistic, but not unreasonable, and it is important to note that their forecast optimistically assumed the 2% payroll tax cut would be extended for 2013. That assumption obviously turned out to be wrong, and will have an effect on future forecasts for the May revision. My initial estimate is that revenues are probably going to be $1-2 billion less than their projections, a little larger than the budget's reserve."

In other words, I thought the January budget actually had a slight deficit that was being covered up by a moderately optimistic forecast.  The May revised budget released today has $1.2 billion less spending for 2013-14 than the Governor's January proposal, in line with the $1-2 billion deficit I predicted in January.   Also, the budget decrease for 2013-14 isn't quite as bad as it looks, because spending in the current year increases with the shift of capital gains revenue forward.

The wild card is the extent to which capital gains were accelerated.  It should be noted that the Federal Government just announced a significant downward revision in the current year Federal budget deficit, but like California, it is largely attributed to a one time increase in capital gains income as investors accelerated capital gains into 2012 before taxes increased.  So California is not alone in viewing these income tax revenues as a one-time phenomena.

Some updated thoughts on the Sacramento Kings' Deal

The news broke yesterday that the prospective new Sacramento Kings' owners agreed to give up their revenue sharing benefits when a new arena is built.

The precedent of that concession seems huge for the NBA, as this revenue sharing agreement was one of the key issues in the 2011 NBA lockout, and was a big deal for the players association.  The report I read said the NBA negotiated this with the group making the bid to keep the team in Sacramento that it just didn't come out of the blue.  While the initial reaction is that it is a vote of confidence in the Sacramento market by Vivek Ranadive and his ownership group, and it is, it also seems like it could be a back door way for the NBA owners to try to take apart pieces of the 2011 collective bargaining agreement that they don't like.  I would be interested to know if the players association has a point of view on this development.

I have also taken another look at the arena deal as some more details have been trickling out on the envisioned financing structure (i.e. interest only 8 years on the parking bond) and I wasn't aware of the value of the billboards given away and some other terms.  It is still better than last year's deal, but I think my initial estimate of a $4-8 million annual toll on Sacramento's general fund was too low, and it is probably more like $8-12 million.  The city does get some benefit for that investment, and it is a close call on whether it is worth it to the city.

Which Public Workers Are Most Overpaid In California Compared to National Norms? Water Utilities or Public Safety

There has been a lot of talk in California water about the inability of the State Water Project (SWP) to compete with the salaries paid by local water utilities.  The problem for SWP is real, and I agree that with the Delta Stewardship Council that it is a threat to water supply reliability.  But some comparative wage data gives a little different perspective to the problem, and has implications for other statewide water reliability issues as ratepayers will soon be asked for large rate increases to pay for the Delta tunnels and other grandiose projects pushed by local water agencies.

Are State Water Project wages too low, or are local water utility wages too high?

The data below comes from the Census of Employment and Wages, a full nationwide census of wages by industry compiled from tax filings by the Bureau of Labor and Statistics.  It doesn't include employer paid benefits, like pensions.

In the private sector, the average job in California pays 13.6% more than the average job in the U.S.  That is mostly driven by the huge salaries in the state's tech and entertainment industries, wages are pretty equal to the U.S. for most ordinary jobs.

State government jobs in California pay an average of 26.5% more than the U.S. state government average.  Within local government, there are really interesting differences across sectors.

Local government education (K-14 schools) average wages are 10.7% higher in California than the U.S. average.  Teachers are about the only public workers in California whose salaries are in line with national norms and the local private sector.  Except California has some of the highest student-teacher ratios in the country.  School funding in CA is pathetic, and a serious long-run economic problem.  The average public utility salary in California is almost double the average public school salary.  You don't see that level of disparity in the rest of the U.S., and it is these kind of cost differences and spending priorities that are hurting the state's long-run competitiveness.

Other than teachers, California local government workers make enormous salaries compared to their national counterparts.  While the high salaries of police and firefighters are well-known, the premiums earned in the public water sector in California are even higher.

Local government safety and utility workers in California both earn wages that are 37% higher than the U.S. average.  If you drill down to water utilities (NAICS code 22131), the wage premium paid to public California water agency employees baloons to 44% more than the U.S. average.  California skews the U.S. average higher too, so if you  take California out of the U.S. data and compare us to the other 49 states, the gap rises to around 60%.

That's right, local water agencies in California are paying higher wages relative to national norms than the state's notoriously well-compensated police and firefighters.   By many accounts, the Metropolitan Water District pays the highest wages and is driving the statewide wage inflation.

Some think the solution to the State Water Project employee retention problem is for it to break away from DWR/state, and become more like Metropolitan.  Looking at the wage data, one wonders whether we should be looking equally at solutions that focus on controlling local water utility costs/wages rather than increasing the costs/wages of the state water project.  Rather than making the SWP more like Metropolitan and independent from the state, maybe we need to bring Metropolitan under the control of the state legislature. The Legislative Analysts Office (LAO) and others have been arguing for years to bring DWR more under the purview of the legislature, not less.

Even if there is no action, there could be some ratepayer revolts brewing for the local water agencies that put downward pressure on the salary gap and indirectly help DWR's retention problem.

Postscript 1:  Some links   if you want to look up the wage data for yourself.
http://www.bls.gov/cew/ew11table9.pdf,  http://www.bls.gov/cew/#databases

Postscript 2:  New story in the LA Times about salaries at one of the largest local water utilities becoming a major political issue.  Salaries rising sharply as their customers incomes fall, and the union is financially backing one of the mayoral candidates and asking for more raises.
http://www.latimes.com/local/lanow/la-me-ln-dwp-pay-20130507,0,1472728.story

Postscript 3: I see Jon Ortiz wrote about this issue in today's Sac Bee.  Despite what I wrote above, I agree that their is some logic in transferring the State Water Project to the contractors, it might help with this employee retention issue and eliminate some of the conflicting incentives and mission for DWR.  Nevertheless, I think this discussion would be improved with some discussion of trends in local water agency salaries and costs and whether this is a temporary or long-term phenomena.  The economics of these local water agencies is changing, and they are going to have increasing conflicts with ratepayers as they try to push through hefty rate increases in the coming years, and it is a safe bet that these salaries will become an increasing issue with ratepayers and harder to justify to their boards.  Some of the current salary gap reflects an unsustainable trend in California local water agency salaries that in many cases kept rising through the recession while other public and private workers saw their salaries decline.  Police and fire compensation is under pressure due to a local government financial crisis that has yet to hit water agencies in the same way... yet.  Nothing like the bond debt for a $15 billion Delta tunnel project that doesn't yield any new water supply to bring on a future financial crisis for some of these local water agencies.

New PPIC Survey Makes A Strong Case for a No-Tunnel BDCP Alternative

The latest PPIC Delta report includes the results of an interesting survey of scientists and stakeholders on options to improve the Delta ecosystem. 

Looking at the key table of findings (table 2, page 14), the tunnels are down in the bottom right of the PPIC table, low potential impact for fish, low scientific consensus, and high cost.  It is the worse possible outcome in this ranking (upper left quadrant is best, lower right is worst).  Nevertheless, the PPIC calls the BDCP "promising" even though it is completely focused on the lowest ranking, most controversial option, and unnecessarily ties many of the more valuable, less costly, and less controversial habitat measures into a package with the tunnels.

As I have stated repeatedly, the ESA does not require the tunnels!  The state can and should develop strong no-tunnel options for the BDCP.

Although the tunnels fared terribly in their survey, the PPIC does not highlight that conclusion.  Instead they offer reasons they think the tunnels are better than they look in this ranking.  For instance, they talk about how the measures interact with one another, but they do so in a biased way - pointing out how the tunnels might support some measures while omitting how they work against other measures.  For example, on page 14, they state "If managed for conservation objectives, a tunnel could facilitate more variable flow patterns (#20) and reduce entrainment (#16)—two actions scientists consider quite promising."

What is the offsetting factor that they leave out?  The tunnels conflict strongly with the strategy of reduced exports (#17) which was also one of the highest ranking options for effectivness.  Their study finds that reducing exports has both higher environmental benefits and lower costs than the tunnels, thus I find it strange that they keep advocating the tunnels over reduced export strategies.  It is clear that exports will not be reduced with the tunnels, and will likely be increased from current levels.

Two other quick observations from the new PPIC report:

1.  Water exporters received, by far, the lowest grade for scientific knowledge of any of the stakeholder groups.  They even got a negative score for 2 out of 3 categories!  At least the Delta folks got a passing grade.  Table 7 from this supporting report has the results.

2.  The cost of the tunnels are only $$$!  Why did they use these 3 cost ranges with symbols? , $, under $10m annually, $$, 10m - $99m annually, and $$$, is $100m or more.  Why didn't they put numbers for the estimated cost ranges in the table?  And if they are going to use symbols, they must have a consistent meaning.  This is the kind of PR garbage that professors routinely mock in the first week of statistics.  It makes it look like the cost of the tunnels are not that high, even though they are orders of magnitude higher than measures that received the same symbolic rating.  It is reminiscent of the early BDCP screening studies I criticized for their biased, pro-tunnel analysis.  See this old post, "Would BDCP staff accept dots instead of dollars in their paychecks?" 

If a $ equals an annual cost of $10 million, then the cost of the tunnels is not $$$, but ranges from approximately

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ to
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Sacramento Kings Surprise

It looks like the Kings' are staying in Sacramento.  I had been putting the odds of that as 1 in 3, so I view the announcement of the NBA committees unanimous recommendation to vote against moving the francise as a bit of an upset.

Last year, I was against the railyards arena proposal, but I think that the new downtown plaza plan is significantly better, enough so to move me to a neutral position on the wisdom of the city's arena subsidy.  (See this post for my initial reaction to the new proposal.)

Although it has been a painful year of uncertainty, it looks like things may work out significantly better for Sacramento because the Maloofs' backed out of the original deal. 

BDCP Appears to Have Canceled Their Statewide Benefit-Cost Analysis (Updated 4/24 3:30 PM)

In Fall 2012, BDCP announced it was finally going to do a statewide benefit-cost analysis after refusing for years.  The framework and preliminary results from some components were described by Dr. David Sunding in BDCP Finance Working Group Meetings in November and January that I attended, and a scope of work was released.  While I was initially encouraged, it became clear in these meetings that BDCP was not going to allow Dr. Sunding the freedom to do a correct and comprehensive benefit-cost analysis.  I submitted comments at the requested deadline that said BDCP should stop saying they are doing a benefit-cost analysis since they are not following the guidelines established by their own agencies.

I had not heard anything else about it until yesterday when the new BDCP glossy sheet describing economic studies was released.  It describes six "studies" and none of them are the statewide benefit-cost analysis they said they were doing.  The six studies include:

• BDCP Chapter 8:  Costs and funding sources.  Notably, they say this will still not be a complete financing plan.
• Alternatives to Take:  This sounds like it could include some interesting new analysis but details are murky.  It is described as an economic feasibility analysis to undefined alternatives to take which are said to be different than the alternatives in the EIR.
• Economic benefits of the proposed project to participating water agencies.  This will be an update and detailed technical report of the informative, but narrow one-sided analysis Dr. Sunding has already presented at several meetings. 
• Statewide Economic Impact Study:  This sounds more useful than it is.  It will look at economic impacts on some stakeholder groups who oppose BDCP, like Delta farmers, but is not nearly as balanced as it sounds.  It will likely generate some useful information, but like most economic impact reports, it will lend itself to distorted interpretations and generate lots of talking points for PR flaks.  Notably, it does not seem to include any estimate of the economic impacts of higher water rates on consumer spending and industrial activity or the economic impact of diverting dollars from the state general fund to pay the water bond.
• Employment Impacts of BDCP:  This was already released and is being used for pro-BDCP talking points.  What the pro-BDCP PR flaks who write these memos aren't pointing out is that the 137,000 job years over 50 years for over $20 billion in public spending over that period is actually pathetically weak job creation.  It is roughly 6 jobs per $1 million in public spending which is about the worst job bang for the buck I have ever seen.  Most public works programs create 10-20 jobs per $1 million.  BDCP alternatives will undoubtedly create more jobs.
• Socioeconomic Impact from the Environmental Impact Report (EIR):  Nothing new here, a required part of the EIR.

The new economics glossy says they are going to let the public interpret this hodge podge of narrow reports, rather than have their consultants put this and other information together into a comprehensive benefit-cost analysis.  While there is some additional analysis, this is a complete regression to the position BDCP was taking a year ago when they were dodging the benefit-cost analysis question.  The summary of the glossy sheet says:    

By examining the costs of BDCP in Chapter 8, the benefits of BDCP to the participating agencies in the contractor benefits study, and the economic impacts of BDCP on other affected parties in the statewide economic impact study, the public can determine whether the BDCP is a good investment for California.

While that may sound democratic and inclusive, and is more accurate than mislabeling their reports as benefit-cost analysis, I am sure the public and the legislature would appreciate it if they would let their esteemed professor interpret his own studies in a comprehensive benefit-cost analysis, and defend it in independent peer review.  I haven't talked with Dr. Sunding in quite a while, but think I know him well enough to guess that he would prefer that too.

Instead, we will have Jerry Meral and the pro-BDCP flaks helping the public interpret his work.  As an antidote to the spin, I recommend the public read my preliminary benefit-cost white paper from last summer.  Using BDCP's own numbers, I concluded the benefits fell $7 billion short of the costs.  I will update it if these new and revised studies yield new information, but preliminary results revealed to date do not show a huge difference.

There still are some problems with the definition of BDCP alternatives in these studies.  Although it sounds like they have made some improvements and are going to look at something resembling the small-tunnel "portfolio" plan, they also appear to be continuing to ignore the seismic levee upgrade alternatives.  And thus the BDCP that makes a big deal about natural disasters in the Delta will continue to ignore a lower-cost alternative that addresses the co-equal goals while creating the additional benefits of saving hundreds of lives in the event of an earthquake, in addition to protection of the billions of dollars in private property, transportation and energy infrastructure damage that will receive no protection from the BDCP.   The results of the BDCP studies will depend a lot on what they assume as the "no action" or no-tunnel alternative in terms of water supply and flood protection.

One can't help but wonder what prompted the cancellation of the benefit-cost analysis just a few weeks before it was supposed to be released in final form.  I went back to the scope of work of the purported benefit-cost analysis and made note of the descriptions of Task 3, due in late March or early April, and Task 4 due in mid-May.

Task 3. Prepare Draft Technical Report
Once the analysis is complete, a draft technical report will be prepared that describes the
methods used, the results, and draws overall conclusions about the cost and economic benefit of BDCP. This final section will offer an opinion about whether benefits exceed costs from a statewide perspective, and over what time frame. The concluding section will also summarize the impacts in various regions of California, and to various interest groups.
The draft technical report will be submitted for review by the California Department of Water Resources (DWR), Reclamation, and the water contractors involved in the BDCP.

Task 4. Prepare Final Technical Report Based on comments received on the draft, the Contractor and Brattle Group will revise the technical report and prepare a final report suitable for public distribution and web posting.

Perhaps cancelling the benefit-cost analysis report in favor of this release of a hodge podge of mini-studies was the revision ordered for Task 4.

Update 4/24:  I added a bullet list of the 6 studies with brief comments, and deleted a reference to the $23 billion BDCP that caused some confusion.  The $23 billion came from a 2012 estimate of $14b tunnel construction, $4b habitat construction, $5b operation and maintenance costs over 50 years.  Some had misinterpreted that I was saying that building the tunnels would cost $23 billion.  A few other minor edits too.

Is Westlands Exagerrating Drought Impacts Again?

After a dry winter, it's looking like another tough year for Westlands Water District.  The latest CVP allocation announcement was 20%, and like the 2009 drought, it has brought out claims of economic loss.  The claims of loss are higher than were experienced with the 10% allocation in 2009, so on the surface they would appear to be exagerrated.

For example, Westlands General Manager Tom Birmingham says Westlands farmers alone will lose $350 million in revenue, and total economic impact will exceed $1 billion.  In this letter (that I only read thanks to Mark Borba's infamous rant), Congressman Costa says there will be agricultural production losses in the San Joaquin Valley of $873 million and economic impacts of $2.2 billion.  Neither statement reveals the source of the numbers.

The Westlands website (which to their credit, provides nice data) includes a page with historic water supplies and fallowing, and includes a prediction of 2013.  Their forecast for 2013 is for an all-time high of 175,000 fallowed acres.  That's 20,000 acres of fallowing more than in 2009, when they had 100,000 af less water.  That doesn't seem right, but maybe there is a logical explanation for it (if you know why, or have a plausible explanation, feel free to put it in the comments). 

I created some simple regression models this afternoon, and got forecasts ranging from 113,000 to 120,000 acres of fallowing for Westlands in 2013.  If I use my prediction of 120,000 acres of fallowing instead of their predicted 175,000 acres, what is the economic loss.  Baseline fallowing in a wet year is about 60,000 acres, so my prediction is that about 60,000 acres more out of production in 2013 compared to a wet year.  Of that 60,000, no more than about 20,000 could be reasonably blamed on environmental restrictions, the rest is due to the dry weather.

What will be fallowed?  If history is a guide, it will mostly be cotton.  So my quick estimate of the impact of the biological opinions in 2008 on Westlands is about 20,000 acres of lost cotton production, representing about $50 million in farm revenue.  [Of course, the farmers loss is more than that, because supplemental water and groundwater pumping is more expensive than CVP supplies.  However, Westlands cost for water transfers is another farmer's income in the Valley.]

Across the entire San Joaquin Valley, I think a reasonable estimate would be $100-150 million in revenue losses and about 2,000 jobs due to the biological opinions in 2013. 

That's a real economic impact that shouldn't be ignored, but it is about 85% less than claimed by Mr. Birmingham and Congressman Costa. 

What Should We Assume About New Technology in California Water Policy?

When we talk water in our Center at Pacific, my colleague Dr. Pogue always brings up the lack of emphasis on new technology in California water debates, and the assumption of constant technology that undergirds virtually all economic and planning studies.  Dr. Pogue's PhD is in the economics of technological change, and I should listen to his advice more.  But I am as guilty as anyone in making conservative technology assumptions, as I don't want to be accused of making unrealistic assumptions to tilt an analysis.

However, California water policy is driven with built in expectations of sea-level rise, changing precipitation and levee-exploding earthquakes.  We accept those assumptions, but not assumptions about advancing technology.  I am confident that we will have game-changing technological advances concurrent with if not before any of those climate change and natural disaster impacts hit California water in a large way, and I am certain we would if our policies did more to encourage these technological advances.  If water policy analysis is going to assume 18 or more inches of sea-level rise by 2050 and a 2/3 chance of levee destroying earthquake by 2050, it seems realistic to also assume that the real cost of alternative water supplies, including desaliniation, will drop by half or more in the same time frame.

In fact, last month, Lockheed Martin acheived a patent for Perforene, a carbon membrane the width of a single molecule that promises to reduce the energy requirements of desalination by one-hundred times. 

we believe that this simple and affordable solution will be a game-changer for the industry,” said Dr. Ray O. Johnson, senior vice president and chief technology officer of Lockheed Martin...At only one atom thick, graphene is both strong and durable, making it more effective at sea water desalination at a fraction of the cost of industry-standard reverse osmosis systems.

But that isn't the only new desalination technology on the horizon.  In the past year, Lawrence Livermore National Lab has been touting its own technological breakthrough, flow-through electrode capacitive desalination.  They have a prototype and patent application pending, and are seeking industrial partners to help it bring the technology to market.

LLNL has developed an innovative technology that promises to unlock an almost inexhaustible water source for U.S. and global population markets.

And they aren't the only ones working on new desalination technologies, and more advances continue in water efficiency, recycling, and stormwater capture.  Now that we have reached the point where two highly credible sources like LLNL and Lockheed Martin are a few years from bringing important new technology to the market, I think it is time to more explicitly embrace technological innovation in California water planning and policy. 

If California were to focus more on these types of technological breakthroughs, we would not only be solving our own water problems but helping to solve a critical present and even greater future problem in poor, developing countries.  We could develop technologies and advanced manufacturing here, and sell to a global market.

Instead, California water policy is fixated on a pair of $14+ billion concrete tunnels, where an estimated $3 billion of the total will be spent on foreign tunneling machines and plumbing components.  It seems so last century and unCalifornia to me.  This is the state that funds stem cell research, that has moved ahead with cap-and-trade and supported alternative energy supplies, and has the most innovative technology center in the world in Silicon Valley.

What if it became a goal of state policy to shut-down the state water project pumps over the Tehachapi mountains in 20 years?  What if both southern California and Silicon Valley were to stop importing water from the Delta.  It sounds less crazy to me than past technology goals like putting a man on the moon, or current California policy goals like bringing carbon dioxide emissions down to 1990 levels by 2020. 

Unlike the current Delta plan, developing these water supplies would actually increase the state's water supply, and pumping less over the mountains would make more low-cost water available for San Joaquin Valley agriculture as well as support higher outflows for fish.  Developing these alternative water supplies would create thousands of jobs in California, save energy, and foster the development of new California industries to sell water technology around the globe.  The only loser would be the Metropolitan Water District (the agency itself, their customers would benefit), and therein lies a major problem.

The only way to finance the collosal debt of the Delta tunnels will be to keep southern California and silicon valley dependent on Delta water.  I have heard people say the state should do the BDCP and develop advanced water technologies and alternative supplies, but the two visions are fundamentally in conflict.

Could Stockton Bankrtupcy Case Threaten Proposition 13?

As the Stockton bankruptcy case moves into the next phase, two questions will loom large:
1.  Does the City's plan of adjustment treat similarly situated creditors equitably?
2.  Can Federal bankruptcy law invalidate state laws?

These are the headline issues because the bond insurers argue that pensions, protected by state law, should be adjusted in the City's bankruptcy.

CalPers made an interesting response to this argument in a recent op-ed in the Sacramento Bee titled "CalPers Protects State Constitution."

  In bankruptcy court, the bondholder creditors – and their insurers – are seeking to use the power of the federal government to invalidate this decision of the city. These creditors have argued that federal bankruptcy laws allow the court to ignore California law and to impose a type of "pension reform" on the city, against its will.

The legal dispute is not over the level of benefits provided to city workers; instead, it will turn on a much broader issue: the ability of the federal government to invalidate laws enacted by California that govern its cities, their pension plans and the pension benefits provided to public workers.... 

We also shouldn't ignore the inherent danger in accepting the arguments made by bondholders and their brethren insurers. If the bankruptcy court can invalidate state laws governing pensions, then why not other state laws? For example, why not Proposition 13? Of course, raising taxes would be in the interest of these creditors and they have argued that the city should be thrown out of bankruptcy court because it failed to increase taxes. 

I wonder if this foreshadows where CalPers will take the bankruptcy case if creditors are successful in their argument that pensions can be cut despite state law.  Will CalPers make the argument that property taxes should be raised above Proposition 13 limitations if the City isn't constrained by state law in federal bankruptcy protection?  Would the City itself even argue that it prefers property tax increases to pension cuts in this case?

Update:  I should note that I am not a lawyer, and just found this to be an interesting argument I have not seen elsewhere.  This argument about invalidating Prop. 13 may be a good political argument, but a weak legal one.  It could be that the federal bankruptcy law is limited in its scope to impairing contracts and would not have broader applicability.  This case is going to get more interesting as it progresses.   

Krugman's California Turnaround

I have a lot of respect for Paul Krugman as an economist, and I have spent many hours defending him and explaining him to business people.  However, his commentary on California published yesterday was not very good.

Below is a graph of California per capita personal income as a percentage of U.S. per capita personal income.  The 2012 data was released last week, but has not been updated in this graph.  It showed that California per cap income held steady at 105% of U.S. per capita income in 2012.  Hardly a comeback story.

This graph does not account for the changes in the cost of living.  According to the CPI, since the 1982-84=100 benchmark, the CPI increased by 5% more in major California metro areas than the rest of the U.S. over the past 30 years.  Thus, if this graph were recreated as real personal income, California real per capita personal income dropped from 115% of the U.S. average to even in a generation.

There are some disturbing signs for the future too.  Education worries me the most.  Levels of education for Californians under 35 are not great, and education funding in the state has gone from good to very low by any measure.  The relative high skills and education level of California's workforce is skewed upwards by the older population which is not the workforce of the future.

This Sacramento Arena Deal Looks Better

The new Sacramento arena proposal is a significant improvement over last year's proposal.  Overall, I think it generates more value for both the City and the investors, and it appropriately shifts some of the risk away from the City and onto the investors.  I will never endorse an arena subsidy for economic development purposes, however if it is the City's goal to retain the Kings' and have a downtown entertainment district, then I think this is a good proposal that could accomplish that objective at a manageable cost. 

This is the conclusion to my commentary about last year's deal that the Maloofs rejected:

The Mayor has worked hard to retain the Kings and has come up with the best proposal he could, one that pushes the City to its financial limit, and yet still doesn’t appear to be a better deal for the Kings than the alternatives, including the status quo. The inevitable conclusion is that, like most sports arenas in medium to small markets, a $391 million arena in downtown Sacramento simply doesn’t generate enough new value to equal its cost. No amount of financial engineering is likely to change that. The new arena is simply infeasible without an owner and/or a City that is both wealthy and passionate enough about pro basketball in Sacramento to overlook significant financial risks. Judging from recent events, both sides seem to have an abundance of passion, but a shortage of wealth.

The latest proposal is an improvement along several dimensions.  First, the site is shifted from the Railyards to the downtown plaza, in the heart of the City's existing commercial district.  This site has better transportation, highly-compatible adjacent land uses, and should generate more spin-off value to private and city-owned assets (like the convention center) in the vicinity.  The railyards site did less for the city's commercial core, and potentially interfered with housing development and other future uses of the railyard site.  In sum, the downtown plaza needs a catalyst like the arena, but I don't think it is necessary at the railyards site, in fact that development of that area may work better without the arena.

Second, the new Kings investor group would bear more of the risk than the City.  They would be responsible for pre-development costs and potential cost overruns, rather than the City.  This didn't necessarily come free for the City, as the city has added 3 small land parcels to the deal compared to last year that are in the vicinity of the arena.  Between these parcels, and the remainder of the downtown plaza site, the investors have the potential to capture a significant amount of the spin-off value for the arena.  They are also a financially stronger investment group than the Maloofs, and they don't currently own an NBA team and an arena (something they presumably want for more than just investment returns).  Thus, they are more willing and able to bear the risk, and it has been shifted to them.

So how much is the risk to the City?  I think the term sheet and the city staff report could be clearer here.  The city is going to contribute about $220 million in cash and several land parcels.  Most of the cash will come from a bond issue.  If we assume 5% interest and 30 year term, and that the city rolls some of the issuance cost into the loan, debt service on a loan of this size would run about $14 million per year (although it sounds like there will be an interest only structure to relieve the burden in early years).  The fact that the city will specifically pledge parking revenues for the payments with TOT (hotel) tax as a backstop is an important detail, but the revenue source that city chooses to use for its subsidy is not as important as the amount of the subsidy itself. 

The net loss to the general fund will be less than this due to what the proposal calls the "backfill."  The proposed amount needed to "backfill" the general fund is the $9 million current contribution of parking to the general fund, but I think this is a deceptive presentation.  The bottom line is the city is taking on new debt for an investment, and the question is will that investment generate enough new revenue to pay for the new debt.  The new revenue sources are a 5% ticket surcharge, and anticipated increased tax collections such as property and sales tax.  The amount of these new revenues is highly uncertain, it depends on ticket revenue, the amount of additional development spurred by the arena, and the increase in visitor spending (i.e. restaurants) in the City that results.  I think this will likely be less than the new debt service.  Thus, the arena will be subsidized, and my best guess is that it will increase the strain on the general fund by $4-8 million per year.

But before anyone howls too much about that, you need to recognize the City budget subsidizes all sorts of things, including recreation such as parks and theaters.  The most relevant comparison in Sacramento would be the Community Center Fund (convention center, community center theater and memorial auditorium).  The Community Center facilities do not come close to generating enough revenue to cover their operating expenses, let alone debt service.  They are "subsidized" by $16 million in dedicated TOT (hotel) taxes each year, although they also generate some spin-off sales tax and parking revenue that could be deducted from this subsidy.  The bottom line is that the subsidy to the Community Center venues is much higher than what is being considered for this arena, and I suspect the arena could give the convention center a boost.  My guess is that some people's position on the arena subsidy has to do with how much they like the arts versus sports.

The arena is no free lunch for the city, and no one should think it is without risk and pays for itself.  While subsidized, I think this is a reasonable plan, and clearly better than last year.  

As a non-resident and part-time commuter into Sacramento who also happens to be a basketball fan, this plan is all benefits and no cost for me!  So I am all for it personally.

State Water Board Meeting Reminds Me of the Hunger Games

Yesterday, the State Water Resource Control Board (SWRCB) opened a 3-day hearing dominated by a discussion of whether (and how much) to increase flows from San Joaquin River.  It brought out the fish versus farmers debate, and I watched passionate testimonials from both sides to the board.

I have worked with all these groups at one point or another (tributary farmers and cities, delta farmers and cities, and fisherman), and all of them are part of the region that we study and serve on a daily basis in our economic research center.  For me, this proceeding is pitting neighbors and family members against one another, an ugly and painful spectacle to watch.

Why did it remind me of the Hunger Games?

Exempted from the fighting arena, and undoubtedly watching the webcast on their computers, were a group of wealthy interests who are influential in the Capitol.

The state and federal water contractors divert massive amounts of water from this river system to places outside the watershed.  They have junior water rights, are wealthier, not even in the river watershed, and in many cases have cost competitive alternative water supplies that they aren't adequately utilizing.  They are a huge part of this problem, whether it is the lack of flow on the San Joaquin from their upstream diversions before it gets to this area, the contaminated runoff from their westside farming, and the massive diversions in the South Delta.

How can they be absent from this proceeding while the peasants (i.e. the relatively small farmers represented by relatively small water districts with senior water rights, both tributaries and Delta, the fisherman, and the environmentalists) are pounding the crap out of each other?

The state/federal contractors must be enjoying the webcast of this gruesome spectacle. I have been watching off and on, and it is making me depressed and angry.

I hope the warring neighbors can stop hitting each other for a moment and find some unity around their common problem with the state/federal contractors.  They need to jointly demand a change to the narrow scope of this process.

P.S.  Yes, I have teen and pre-teen daughters, so the Hunger Games books/movies have been everywhere since we moved past the Harry Potter days.

New County Population Forecasts: Is San Joaquin County growth set to lift off in 2015?

The California Department of Finance released long-term population forecasts at the county level last week.  Their last county level forecasts were issued in 2007.

Overall, their forecast is for significantly slower growth for California, less than 1% annual population growth over the next 50 years.  Their forecast ends in 2060 with a statewide population of 52.7 million and annual population growth falling to below 0.5% and trending down.  If you extrapolate from there, it is unlikely that California sees 60 million in population before 2100.

Despite the slow growth for California, they still predict rapid population growth in the Valley - especially for Kern and San Joaquin County.

In fact, they have San Joaquin County growth accelerating over 2% per year as soon as 2015 and sustaining over 2% growth through 2035.  That is significantly faster than our forecast for San Joaquin County.  According to DOF, San Joaquin County will break 1 million residents by 2030; 75,000 people more than our projection for the same year.  If you use 3 people per house as a simple rule of thumb; that is 25,000 more homes that would be built in the County over the next 20 years than we project - and that is just one of the economic impacts.

While DOF has faster growth than us in some areas, it has slower growth in others, especially in the Bay Areas but also some inland areas such as the Sacramento area.  I am surprised DOF doesn't see faster growth for Sacramento.  For example, DOF is not projecting Placer County growth to increase substantially from the pace of recent years, remaining barely over one percent for the foreseeable future.  I have a hard time seeing San Joaquin County growing twice as fast as Placer County over the next twenty years; as Placer County has often been the state's fastest growing county of late.  I still see a lot of room to develop around Roseville, Rocklin and Lincoln.