Tuesday, July 28, 2015

Mortgage Delinquency Rates Approach Normal Levels in Stockton

According to CoreLogic, the percentage of mortgages 90-days or more delinquent in the Stockton area is now down to 2.24%, pretty close to historic normal rates of 2%.

Five years ago, 20% of mortgages were 90-days delinquent during the peak years of the foreclosure crisis.  At that time, some economists were talking about whether there could be a "squatter stimulus" in the local economy, meaning that some local households actually had more disposable income because they weren't paying for housing.  Those impacts were never large, but it is just remarkable how much the conversation has changed in five years.  It's not surprising, in fact its what we predicted.  But it still seems strange to be talking more about the lack of affordable housing than the foreclosure crisis.

While foreclosures and delinquencies recede to normal levels, it doesn't mean the impacts of the housing crisis are in the past just as Stockton's emergence from bankruptcy protection does not mean the city governments financial challenges are in the past.  Nevertheless, the latest data on foreclosures and delinquencies is a very welcome sign of progress.   

Monday, July 27, 2015

The Consequences of a Massive Earthquake-Induced Delta Flood

The tunnels' PR campaign and some state leaders, including Governor Brown, talk about the catastrophic delta flood scenario as if the only consequence is water exports.  Given that the direct devastation of such an event would be in the Delta itself, there are some serious economic and moral problems with this argument that should be raised given it is the main argument made for the controversial tunnels.

The source usually cited by tunnels advocates for the earthquake risk is the DRMS Phase I study which assessed flood risk and consequences in the Delta.  Its assessment of levee failure probabilities was highly controversial but I will ignore that debate here, and focus on the consequences analysis.  The report described the consequences as follows in the fourth sentence of its executive summary.
"Levee failures and the flooding that follows can cause fatalities, destruction of property and infrastructure, interruption of a large portion of California's water supply, environmental damage and statewide economic impacts."
The first thing it mentions is fatalities, the second is property and infrastructure destruction in the Delta, and the third is water supply.  The DRMS authors put that list in the proper order, as public safety is typically given the highest priority in risk-assessment and the DRMS analysis found that the economic loss to property and infrastructure exceeded the economic loss from interrupted water exports.  Here are the Figures from the reports' executive summary that outline the public safety and economic costs.

For comparison, Katrina killed over 1,800 people and caused hundreds of billions in economic losses.  The 1989 Loma Prieta earthquake in the Bay Area killed 62 people and caused over $6 billion in structure damage and more in total economic costs.  DRMS describes a horrific scenario that could be worse than Loma Prieta and smaller than Katrina, but with a similarly devastating mix of fatalities and economic costs.  However, the public discussion of the Delta scenario is driven by water exporters and focuses almost exclusively on economic losses, whereas discussion of these other events have focused much more on life loss and public safety.

In recent years, I have heard informally that subsequent modeling has shown that shut-down of the export pumps in this Delta flood scenario are more likely to be weeks or a few months, rather than years that are more often heard in the media.  DWR Director Mark Cowin has recently said weeks and months.  I am aware of this presentation to BDCP from a few years ago that supports weeks and months.

I am not aware of any more recent analysis of fatality risk.  Perhaps that would decline in a more recent assessments as well - especially if the levee failure probabilities have been reduced to account for the lower frequency of floods seen in the past decade and levee and emergency response improvements.  However, it should be noted that the fresh water inflows which reduce the length of water export outages in some cases could still be just as devastating to lives, property and infrastructure in the Delta.

In this recent Bee op-ed, my language on this issue was probably too strong, and I would have toned down my earthquake statement if I had known the Bee was going to use it as a call out subtitle.  But this earthquake, salt water, shut-down the pumps argument has once again become the principal case for the tunnels' made by many state political and business leaders.  If that is the main argument, then it needs to face more tough questions about its economic, technical and ethical merits.

Addendum, July 29:
I realize I failed to include a graphic that shows DRMS found water export interruption was only 20% of the cost.  It is tedious to tabulate this from the appendices, but it is relatively easy to derive from this table from DRMS Phase 2 report (taken from Table 18-2).
The table shows that these two types of costs it categorizes as "Statewide" (water export interupption and state highway damage) are only 38% of the total cost from the mass flood scenario, and that water exports is only 51.5% of this 38% share.  Thus, water export interruption is 19.6% of the total cost (.515*.38).

Sunday, July 26, 2015

Additional thoughts and information regarding my Delta Tunnels op-ed in the Sunday Sacramento Bee

Today, the Sacramento Bee published an op-ed by me on the economic benefits and costs of the Delta Tunnels.  As always, word constraints limit what you can see in an op-ed.  This post expands and clarifies a few things.

Financing the Tunnels. The op-ed focuses on economic benefits and costs, and doesn't discuss some of the serious problems with financing the tunnels.  Without going into details, these are myriad and deserve a separate op-ed of their own.  Most notably, farmers would have to pay the majority of the tunnels' cost because they receive the majority of water exported from the Delta.  It is highly unlikely that the agricultural agencies can pay their share, meaning costs will have to be shifted to urban agencies or general taxpayers.  Even if the agencies could somehow make the payments in an average year, how would they do it in a drought when they are receiving no water from these tunnels?  The plan quotes costs on households in Southern California at $5 a month - that calculation is a few years old but assumes that farmers are paying as much as 75% of the Tunnels' cost.  That's not going to happen.  You can count on costs being shifted to urban ratepayers, local property taxes or general taxes because it simply won't fly any other way.

Water Supply:  I hope no one thinks I am advocating a bunch of desalination plants is the best alternative to the tunnels by choosing this comparison to a current, very high cost source.  And yes, I know that energy costs are high with desal, but the energy requirements aren't much different than pumping Delta water hundreds of miles and over mountains to LA and San Diego.

I also could have compared them to new reservoirs.  The much criticized Temperance Flat has a projected water yield of about 70,000 af for a capital cost of at least $2.5 billion.  Yes, even these dams have a better water yield bang for the buck than the Delta Tunnels, but nobody pretends that water users could pay for them.  In fact, there are serious financial viability questions about these Dams even if general taxpayers pay the majority of the costs through the Water Bond and various sources.

Finally, I could point to Rod Smith's old blog that calculated the cost per acre foot per water yield.  Without the regulatory assurance in the Tunnels plan, it is pretty clear that the estimated water yield is only 257,000 af.  Using Rod's handy table, you can see the water cost of the tunnels is about $3,000 af assuming no risk premium.  That's almost 50% more than desal, for less reliable supply.  And the cost is orders of magnitude higher than other alternatives like recycling, conservation, and stormwater capture, and is also orders of magnitude higher than what farmers could afford to pay (their profit per acre foot).

Seismic Risk:  The Mark Cowin comment about weeks and months, not years, was a direct quote from his prepared statement for a media call as transcribed by the remarkable Maven.  It would be nice if the Governor would be so careful in his remarks on this subject.  The fact that the outage would not be as long as claimed seems to be one of those things that "everyone knows".  But this isn't my area, so the only reference I have is this presentation from a BDCP meeting a few years ago that Bob Pyke conveniently posted for the benefit of people like me.  Previous BDCP analysis shows exports from the Tunnels would be about 3 maf per year if the south Delta pumps were disabled, so that would be the benefits to the water exporters in the very unlikely case an outage lasted a full year.  So the loss the State's surface water supply would be about 1/4 the current drought (more in some areas very dependent on Delta exports), but it is not something that would destroy the economy the way the Tunnel advocates rhetoric claims.  The current drought shows the State's economy can do just fine in the face of more severe shortages. 

The loss of life and only 20% of economic damage from loss of water exports comes from the State's DRMS studies.  You won't find it in the executive summary of those studies, you have to compile the data from their consequences analysis the way we did in the Economic Sustainability Plan.  That finding was thoroughly vetted.  It's also common sense.  The Delta is not urbanized, but there is a lot of important stuff out there - including inter-regional highways, gas wells and storage, pipelines, inter-regional power lines, farmland, and people's homes. If we need to reroute the water canals around the Delta due to flood risk, what about the highways and power infrastructure.  Rerouting and elevating these would cost billions more even if we could figure out a route.  Fixing the levees to protect everything together makes a lot more sense. 

And I haven't even mentioned public safety.  I am not one to make moral arguments, but I think this constant discussion of a Delta flood without even mentioning the catastrophic impacts in the Delta itself - including significant life loss - is disgraceful.

The value of regulatory assurance:  The Governor calls it a "technical change" but it is a very big deal to the economics.  Here is my very first post on the subject written when the BDCP rolled out the argument that regulatory assurance was the reason water agencies should pay tens of billions of dollars on a project with such minimal water yield.  One thing to note in the post is that all of the science experts I consulted on this theory at the time told me the regulatory assurance claim was fictional as it would never get regulatory approval.  It is now clear that my sources were right about that.

On the media call, Mark Cowin mentioned that they might have some new economic analysis coming out next month.  It will be interesting to see if they come up with anything new to find more benefits.  I don't think they can, and I expect people to be very skeptical of any new benefits that miraculously emerge at this late point in the process.

Thursday, July 16, 2015

Arena Subsidies, Comedians, and the Sacramento Lawsuit

It was hard not to think of Attorney Patrick Soluri and his clients after watching John Oliver's hilarious take on public financing of professional sports stadiums.  These Sacramentans didn't need a pep talk from a comedian to inspire them to take the City to court over the financing of the Kings' arena.

I have reviewed a number of documents surrounding Sacramento arena financing and this specific case in recent years, and I have mixed feelings about it.  Like John Oliver (a comedian making a serious point) and virtually every serious economist, I believe these publicly financed arena deals are usually bad policy - often by the cities that can least afford them - and the economic development benefits are typically overblown while the budgetary costs are understated.  There should be a lot more questions of the politicians and team owners who orchestrate these deals.  Unfortunately, it seems there are a lot more accolades and parades (and apparantly a glowing ESPN documentary in Kevin Johnson's case) than tough questions.

But this lawsuit goes beyond tough questions and alleges a fraud on the public, primarily by giving the Kings' rights to electronic billboards and a downtown parking garage without making a proper valuation of those assets.  I would agree that the City's presentation of this part of the deal is deceptive and understates the value that is given away (the city staff that said billboard rights are "only" an opportunity cost since the City general fund is not currently receiving this revenue should be suspended without pay and enrolled in ECON 101).  But hold on, the Kings' also contributed substantial items to the deal that weren't given an economic value either - to name one big example - the Kings' taking responsibility for all cost overruns is hugely valuable - and that is already paying off.

It seems to me that Mayor Johnson and the City were trying very hard to keep the city contribution at a face value of the $258 million since this matched the previously approved deal for the railyard arena under the Maloofs' ownership.  It is probably true that they hid the value of some things to keep the contribution at that number.  But as I mentioned before, there were unvalued changes on both sides of the ledger.  Notable changes on the cost side include the electronic billboard rights and the downtown garage as the lawsuit points out.  On the benefit side, the new Kings owners took responsibility for cost overruns, and arena lease payments to the City were modified to fixed amounts rather than convoluted structure in the Maloofs' deal that had a lot of risk for the City.  The arena was moved to the blighted downtown Plaza - where it will provide a lot more value to the City's revitalization efforts.

My opinion on this arena deal hasn't changed.  The City's new arena deal with Ranadive's group is better than the deal the City had with the Maloofs.  I opposed the Maloof deal, but moved my position to neutral on this one as a result of the improvements.  I am cautiously optimistic about it catalyzing positive change in downtown Sacramento, and it may prove worth the costs.

My larger concern is that the Arena deal will lead to a larger erosion of budget discipline by the City. The arena subsidy does impact its general fund, and it means the City can afford to spend less than it could in the absence of the Arena. But the City Council recently approved budgets that spend beyond the City Managers recommendation, and they are now encouraging a vision for hundreds of millions of dollars for a new performing arts center when a few years ago they couldn't afford a renovation.  And there are probably more requests coming all the time, because it is politically much harder for electeds to say No after saying Yes to subsidizing a basketball palace for millionaires.

July 24 Postscript:  The judge ruled in the City's favor today, rejecting the claims of fraud.  While I would not go quite as far as the Judge in some of his criticism of plaintiff's arguments quoted in the Sac Bee's article, I think he is correct that there is no fraud here.  In fact, I think the City's leader listened constructively to some of the criticism of their deal, and that Sacramento's arena deal actually got better for taxpayers with each iteration of the plan, whereas it seems so many big public projects these days see the costs to the public grow while the benefits shrink as they progress (i.e. Bay Bridge, high speed rail, Delta tunnels). 

Thursday, July 9, 2015

Revised Delta Tunnels EIR Further Worsens The Project's Already Lousy Economics

The Department of Water Resources did not release any revised cost estimates or economic and financial analysis Thursday with the revised EIR for the Tunnels.  However, I saw three changes in my initial review that have significant economic effects, the first of which has already been revealed and discussed.
  1. The new plan drops the 50-year permit, and any notion of regulatory assurances about future water deliveries.  This change has already been revealed and discussed, but its importance to the economics can not be understated.  According to the State's BDCP consultants, the regulatory assurance was the basis for over half of the economic value of the Tunnels to the water exporters' who would finance them.  As I have discussed repeatedly (see  herehere, and here for examples), the already flimsy economic case for the Tunnels completely falls apart without the regulatory assurance.  It drops the estimated benefits by nearly $10 billion.
  2. The average annual incremental water yield with the tunnels compared to "No Action" has dropped by 135,000 acre feet(af).  The 2013 EIR (table 5-9) had 4 scenarios with an incremental yield that ranged from a loss of 27,000af to a gain of 821,000af, and an average gain of 392,000af across all 4 scenarios.  The new EIR has 2 scenarios with an incremental yield ranging between a loss of 23,000af to a gain of 537,000af which is an average gain of 257,000af.  Thus, the best case scenario for water exporters dropped by 284,000 af, and the average dropped by 135,000 af.  That loss of water yield would drop benefits by about $1 billion.
  3. The new plan shows the estimated construction period has grown from 10 to 14 years.  It's buried in the Appendices (see here and here), but the construction period is now described as 2016 to 2029, compared to 2015 to 2024 in the 2013 plan.  An extra 4 years of waiting to receive any economic benefits (while accumulating financing costs) will further reduce the benefit-cost ratio. 
In 2012, I estimated the net benefits of the Tunnels' as -$6 billion.  In 2013, BDCP consultants estimated +$5 billion.  Virtually all of the $11 billion difference was driven by differing water yield estimates that were entirely due to the regulatory assurance (50-year permit) assumption.  After these changes, I think my -$6billion from 2012 looks overly generous, and something like $-8 billion in net benefits seems more likely. 

I should also mention a few other changes in the EIR that could have marginal economic effects.  There are some changes to the water quality modeling that could be a significant issue for the environmental permits, but I suspect will have little impact on the project economics.  The design changes to the North Delta intakes marginally reduce negative economic impacts in the Delta, but are unlikely to significantly impact the overall project economics unless it significantly changes the estimated cost.

The project just keeps getting worse for the water exporters.  If the water agencies' leaders were really looking out for their ratepayers and the best interests of the state, they would drop it.  But they won't, although some are starting to waver in their support.  I will save my thoughts on why they keep standing by this lousy project for a future post.