Friday, October 12, 2018

November 2018 Propositions: How I am voting

The November 2018 California ballot has 11 Propositions, most of which are focused on economic issues.  Because of this focus on economic issues, the Center for Business and Policy Research included recommendations and analysis from myself and Associate Director Thomas Pogue (the guest blogger on proposition 7) in the economic forecast we released this morning.

This morning I took a look at the Democratic and Republican parties endorsements, and found that I agree with Democrats on 6 out of 11 Propositions, and agree with Republicans on 6 out of 11 Propositions as well.  I guess that makes me a moderate.  Interestingly, Democrats and Republicans agree on three Propositions (2-Yes, 3-Neutral, and 7-Yes).  I disagree with both parties in one of these cases, Proposition 3, where I oppose and both parties are neutral.

In general, bond issues have a lot more credibility when they go through the legislature like Propositions 1 and 2, and thus have been considered in the context of the full state budget.  Voters should be highly skeptical of bond propositions that go directly to voters to seek public subsidies like Propositions 3 and 4.  The enormous size of the water bond ($9 billion, 50% larger than the combined total of legislatively backed housing bonds) is a good example of the fiscal problems of special interest financed bond initiatives.

Proposition CBPR Dem Repub
1 Yes Yes No
2 Yes Yes Yes
3 No Neutral Neutral
4 No Yes No
5 No No Yes
6 No No Yes
7 Yes Yes Yes
8 No Yes No
10 No Yes No
11 Yes No Yes
12 Yes Yes No

Proposition 1:  Yes.  Proposition 1 authorizes $4 billion in bonds for various affordable housing programs.  The availability and affordability of housing is a worsening problem across all of California, and is arguably the State’s biggest economic challenge.  The cost of developing affordable housing is extremely high in California, more than double some other states, and thus the funding in this bond will not deliver as much housing as it should.  While it is tempting to vote no until stronger actions are taken to reduce costs, the need for affordable housing is so great that we support the bonds.  
Proposition 2:  Yes.  Proposition 2 authorizes $2 billion for housing programs for individuals with mental illness.  It passed the California Senate unanimously, and the Assembly 72-1.  This bond deserves support, although we urge further actions to reduce the cost of developing affordable housing in order to maximize the benefits of this funding.
Proposition 3:  No.  Proposition 3 would authorize $8.9 billion in bond borrowing for a variety of water related projects, and creates an unjustified subsidy from the state’s greenhouse gas cap and trade program for 4 designated water agencies supporting the bond, including the Metropolitan Water District and Westlands Water District.  While a portion of Proposition 3’s funding would go to needs that are worthy of state public funding, the majority of Proposition 3 is terrible policy that provides undeserved subsidies to special interests that represents California water politics at its worst.  Since 2014, the legislature and Governor Brown have supported over $11 billion in new water related bonds in 2 separate elections, including the $4 billion Proposition 64 in June 2018.  Thus, most of Proposition 3 consists of poorly justified subsidies that couldn’t make it through a legislature and Governor that have been very supportive of water spending.  In addition to the enormous size and weak justification of the Bond, the hidden inclusion of an energy subsidy for water agencies that divert and pump water uphill from the environmentally troubled Delta is reason enough to vote no on Proposition 3.
Proposition 4:  No.  Proposition 4 would authorize $1.5 billion in bonds for children’s hospitals and was placed on the ballot by a petition funded by an association of children’s hospitals that would receive the subsidies.  While children’s hospitals are valuable institutions in California, funding them through state general obligation bonds is poor public policy. 
Proposition 5:  No.  Proposition 5 would expand the property tax limitations from Proposition 13 for California homeowners over the age of 55, by allowing them to transfer the lower property tax bill of their current home to any other home they purchase in the state.  Proposition 5 would address one of the negative consequences of Proposition 13, inefficient “house lock” that occurs since moving often triggers higher property tax bills for homeowners because the new home is assessed at its current market value.  Proposition 5 eliminates this perverse incentive, and thus would have a positive effect.  Unfortunately, Proposition 5 solves a Proposition 13 problem by further increasing the large tax burden inequities embedded in Proposition 13. 
Proposition 13 is inequitable because homeowners with similarly valued homes pay vastly different property tax bills based on when they purchased the home.  It conveys large tax benefits on older homeowners who bought their houses decades ago, as well as those who had fortunate market timing and bought during the dips of California’s roller coaster real estate cycles.  The Executive and Associate Director of CBPR both bought houses in 2010 near the bottom of the market, and would likely benefit handsomely from Proposition 5 in a few years as we become eligible empty nesters.  While we would personally benefit from Proposition 5, we oppose it because it perpetuates and expands Proposition 13’s inequities and distortion of California’s real estate markets and local public finance.  The “house lock” incentives could be addressed by reforming Prop. 13 to reduce its inequities rather than by expanding them.      
Proposition 6.  No.  Proposition 6 would repeal gas and vehicle taxes passed by the legislature in 2017 to fund transportation projects around the state.  While we don’t generally favor tax increases and understand that the high cost of motor fuels imposes a heavy cost burden on many Californians, these taxes are an appropriate and fair approach to funding much needed transportation improvements.  Fuel and vehicle taxes are far more economically efficient than funding transportation with general fund revenues (primarily income and sales taxes) as many Proposition 6 advocates have argued. 
Proposition 7. Yes.  Proposition 7 would start a process that could lead to year round daylight savings time (DST) with federal approval.  The proposition would potentially end twice yearly time changes and their associated disturbance to sleep patterns. While the energy saving benefits of DST are questionable, increasing evidence shows the sleep disruption from the time changes may be associated with a range of social costs ranging from pedestrian, motor vehicle, and workplace accidents to workplace productivity losses and declines in student learning. The proposition’s adoption of year-round DST would also facilitate potential increased consumer impacts in shops and restaurants as well as outdoor recreational activities because of the extra-daylight.  Plus, if Tom were to recommend a no vote his wife and son would combine their late-night and early morning preferences to ensure he is sleep-deprived no matter what the time change. 
Proposition 8.  No.  Proposition 8 would regulate prices charged by dialysis clinics based on the cost of care.  In general, attempts to limit prices by law reduce economic efficiency, reduce the supply of goods and services and can have many unintended consequences.  Prop. 8 has been supported and funded by labor unions seeking to unionize staff of dialysis clinics, and is opposed by the owners of dialysis clinics, and many major medical professional organizations in the State.
Proposition 9.  “Three Californias” initiative was removed from the ballot.
Proposition 10.  No.  Proposition 10 would greatly expand the ability of local governments to enact rent controls on residential property.  Economic theory and decades of research are clear that rent control reduces the quality and quantity of rental housing over time, leads to an inefficient allocation of rental units by reducing mobility and encouraging overconsumption of housing by those who are able to secure rent controlled apartments.  California’s affordable housing crisis is severe, and the desire for rent controls to create some immediate relief and cost savings for some is understandable.  On the other hand, the many harms caused by rent controls accumulate more slowly over time and the research is clear that it will do more harm than good for California’s housing market in the long-run.
Proposition 11.  Yes.  Proposition 11 would allow private ambulance companies to require their employees remain on call during meal and rest breaks.  This is current practice, but a recent ruling in a lawsuit requiring uninterrupted breaks for private security guards, is expected to end the practice of on-call breaks by ambulance companies.  Eliminating on-call breaks would significantly increase the cost of maintaining current EMT service standards, requiring increased staffing that would raise health insurance and local government costs.
Proposition 12.  Yes.  Proposition 12 would require cage-free housing for egg-laying hens by 2022, and increase required space for breeding pigs and veal calfs.  Interestingly, UC-Davis agricultural economists have been silent on the economic effects of this bill after receiving withering criticism and a lawsuit from the Humane Society over a study of the costs of 2008’s Proposition 2, which increased space requirements for hens but did not go as far as the current proposition to require cage free production.  Economic studies have shown Prop. 2 raised egg prices in California by between 50 cents and $1 per dozen.  The cost of living index data we collect for the Stockton and Sacramento areas finds that eggs are more than twice the price seen in many other parts of the county, a much higher cost differential than any other grocery product we survey.  Proposition 12 will likely further increase the cost of eggs in California and its costs will be disproportionately felt by low-income households.  However, the California cost difference will likely decrease over time as major retailers and restaurant chains around the country have announced plans to shift to cage free eggs that will change production methods across the industry.  Surprisingly, the most public opposition is not from the agriculture industry or consumer activists, but animal welfare activists who claim the Prop. 12 does not go far enough.  While concerned about the cost to low-income households, we recognize the legitimacy of growing animal welfare concerns and that an industry shift is already underway.  Plus, if Jeff were to recommend a No vote, his wife and kids would have him sleeping outside next to his backyard chicken coop.

Tuesday, September 25, 2018

Bay Area Home Price Appreciation Has Accelerated Again

Last year, Bay area home price growth had slowed.  In addition, it seemed that the limits on mortgage interest and SALT deductions in the new tax law combined with higher mortgage rates would bite harder in the high-priced Bay Area.  Thus, I felt home value appreciation would slow down further if not flatten out in the Bay Area.

It appears I was wrong.  Check out this graph of SF home values as measured by the Case-Shiller Index (from MarketWatch).  Bay area home values are growing at a 10%+ annual rate while other areas have slowed.  Median home prices show the same trend.

What explains this rebound?  The tax law certainly had plenty of benefits for high-income Bay Area residents, so perhaps the gain to their overall after tax income fueled demand more than the loss of tax deductions.  And speaking of income, Bay Area wages continue to grow at super fast rates.  The latest QCEW data shows annual wage gains of about 10% in Bay Area counties.  With housing scarce in the area, it is natural that area residents would spend some of those gains on housing, and incomes have grown proportionally with the housing costs.

For a few years (2016, 2017), Valley housing costs were rising faster than the Bay Area, narrowing the gap.  Now it appears that the housing cost differential between the Bay Area and inland areas is widening again which along with rising mortgage rates, increases the incentive for middle class households to migrate inland. 

New WaterFix Economic Analysis is Even Worse Than I Originally Thought

It turns out my initial reaction to the Brattle Group's latest WaterFix benefit-cost analysis was too nice.  I am receiving feedback that the sea-level rise analysis that the Department of Water Resources' touts as "innovative" assumes WaterFix is operated in ways that harm fish, would violate state and federal laws, and contradicts the commitments that DWR is making about WaterFix to the State Water Resources Control Board and other regulatory bodies.  My quick take didn't mention any of these important fish or legal issues.  

This quote from the Brattle/Sunding report explains its justification for estimating an enormous new sea-level rise benefit from WaterFix.
"DWR modeling indicates that Delta exports are highly sensitive with respect to sea level rise. A rise in sea level means more salinity intrusion from the ocean via the San Francisco Bay, affecting the water quality of exports and requiring more fresh water to be released from upstream reservoirs to meet salinity standards. By 2100, a 2-foot sea level rise becomes a more important contributor to reduced annual south-of-Delta export than does annual inflow change, a result also shown by Fleenor et al. (2008).  The DWR study published by Wang et al. (2011) concludes that sea level rise can be expected to reduce Delta exports by over 119,000 acre-feet annually by mid-century, and by over 520,000 acre-feet annually by 2100. Construction of the WaterFix would prevent these losses by giving water managers the capability to divert water directly from the Sacramento River upstream of the Delta.”
I asked several knowledgeable experts if this was legitimate and received a resounding "No."  Here is an example,
There is no reason to think that building the tunnels will allow a change in water quality standards.  Those standards protect fish and wildlife (the “X2 standards”) and in-Delta agricultural, municipal and industrial uses.  The studies Sunding relied upon (without any apparent understanding on his part of how they were done, what they mean and what their assumptions were) show that with expected sea level rise and assuming no islands flood and all channels get deeper—so they continue to be dredged to the same levels as they are now even though they don’t need to be—more outflow will be needed to meet the current water quality standards.  
Sunding assumes, quite incorrectly, that with the tunnels the extra outflow caused by sealevel rise can instead be pumped through the tunnels, which means the Delta gets saltier and the water quality standards won’t be met.  That would be a disaster for fish, wildlife and those in the Delta who rely upon it for water.  Assuming the water quality standards go away because the tunnels are built is either fantasyland or the worst fears of the in-Delta water users and enviros.  It means either Sunding has no clue about Delta water quality and the reason for those standards, or he and his clients think they can fool people into thinking this project works economically or he and his clients are completely disingenuous about their intentions once the tunnels are built.  So once again, Sunding’s assumptions are complete BS.
Yes, there is quite a track record of Brattle/Sunding making unjustified assumptions to increase the estimated benefits of the tunnels.  Every revision of the tunnels project has made its economics worse, but Brattle/Sunding just make another new assumption to push the benefit-cost ratio over the magic number of 1.

Summer 2012:  After the initial analysis of economic benefits of the Delta tunnels (water supply, water quality, and seismic risk reduction) falls far short of its costs, Sunding/Brattle unveil a new 4th category of benefits bigger than all the rest combined:  "the value of regulatory certainty."  The justification for the benefits are the regulatory assurances that are part of a habitat conservation plan under the ESA.  Critics call regulatory certainty a BS assumption.

Summer 2015:  DWR releases new EIR and revised tunnel plan that shifts from BDCP habitat conservation plan to tunnels only WaterFix.  The new EIR also has substantially lower water supply benefits compared to no action.  Both these changes substantially impact the economic benefits of the tunnels, and DWR promised a new economic analysis within months but never releases it.

Fall 2016:  The suppressed 2015 economic analysis comes out in a public records request.  In order to get a positive B-C ratio in this report, Brattle/Sunding assume away $6.5 billion in costs by assuming a massive, unjustified subsidy.  They also assume the water supply benefit of the tunnels are more than 5 times higher than estimated in the EIR/EIS by continuing to assume the tunnels are exempt from future regulations that are certain without the tunnels.

September 2018:  As the economics of the tunnels get worse, the ridiculous assumptions needed to generate a positive benefit-cost ratio get bigger too.  The analysis released last week embeds a number of inaccurate assumptions:

  • Introduces unjustified $5.7 billion sea-level rise benefit discussed above which implicitly assumes WaterFix doesn't have to comply with Delta water quality standards.  Costs exceed benefits without this assumption.
  • Implicitly assumes the No Tunnel Scenario complies with proposed Bay-Delta outflow requirements, but that the WaterFix scenario does not.  This unjustified assumption increases estimated water supply benefit to more than 6 times the level in the WaterFix EIR/EIS.
  • Introduces a new multi-billion dollar cross subsidy from Metropolitan Water District ratepayers to the Central Valley Project in the form of a low "wheeling rate" for access to the tunnels' conveyance capacity.  
  • Falsely claims that an analysis that is not statewide, and only narrowly focused on participating water agencies, is consistent with the DWR economic analysis guidelines.

Thursday, September 20, 2018

Quick Reaction to the Latest WaterFix Economic Analysis

This afternoon, the Department of Water Resources released a new report from the Brattle Group, "Economic Analysis of the WaterFix: Benefits and Costs to Project Participants."  I gave it a quick review this afternoon, and judging by my inbox, there is high demand for instant analysis - so here it is.

This report is different in several respects from previous analysis of earlier versions of WaterFix by the same consultants.  These 4 points highlight this new information.  The 1st and 4th bullet points in this list are going to cause trouble for the Metropolitan Water District (MWD) in the recent Prop 13 and Prop 26 lawsuit filed against them.
  • It assumes a massive new subsidy for agricultural users cost share from urban water users.  The agricultural subsidy is contained within a "wheeling rate" that it assumes that Metropolitan Water District (MWD) would charge the Central Valley Project (CVP) for using the tunnels' conveyance capacity.  To illustrate this, I used Table 2 and Table 6-7 in the report to calculate the % of water supply benefit and % of project costs for 3 groups, State Water Project Urban (which is mostly MWD), SWP Agricultural, and CVP (which is mostly farms).  
% of Water Yield 44% 24% 32%
% of Costs 63-69% 14-19% 18%
(The % costs is a range because it is unclear whether table 6 or 7 is comparable to the water yield estimates in table 2.  Either way the urban to agriculture subsidy is clear.)
  • The positive benefit-cost ratio depends on a dubious new benefit: the value of sea-level rise protection benefits.  The report estimates the present value of these sea-level rise benefits at a whopping $5.7 billion, a value that exceeds the study's estimated total net benefit of the WaterFix.  That means the benefit-cost ratio is negative for all user categories if this dubious new benefit is removed.  This estimated benefit has never been included in any previous study of WaterFix, and thus it is a new benefit category created for this report when the old methodology fell short of giving a postive benefit-cost ratio.  So how is it estimated?  They use a 2011 DWR report that estimates the water supply loss from maintaining Delta salinity standards under sea-level rise scenarios using the existing no-tunnel system.  Then it assumes that WaterFix eliminates 100% of that loss, which seems to assume that they won't have to meet the salinity standards if they can divert from the new intakes further upstream.  Thus, it seems that this benefit to WaterFix benefits comes at the cost of non-participants downstream from the north Delta intakes.  Those costs are not included in this analysis of benefits/costs, because it only looks at participants.  Furthermore, it is worth noting that the study from which these water supply benefits are calculated does not include any modeling of the Waterfix tunnels operation, and thus it is not clear that the WaterFix would/could prevent this loss.  Why didn't DWR model this with WaterFix?  Why use an old study and make this unjustified assumption?
  • The report, press release and webpage falsely claim that this benefit-cost analysis is consistent with DWR's Economic Analysis Guidebook.  The Economic Analysis Guidebook clearly states that "Although economic analyses can be evaluated from many different perspectives (individuals, communities, etc.), DWR conducts these analyses from a statewide perspective."  The report is clear, even in its title, that it is an analysis from the perspective of water agencies that participate in WaterFix.  It does not consider statewide impacts - which include costs to other water users or the environment - both of which are very large for this project.  This is especially true if one uses the No Tunnel baseline used in this economic study which is extremely different than the No Tunnel baseline used in the environmental impact report and other regulatory documents.
  • The single-tunnel scenario is clearly better for MWD and urban water users if one compares this study to a February 2018 analysis of single-tunnel by the same consulting firm.  While that single-tunnel report had many of the same problems as this one, it did not need to include a highly questionable estimate of over $5 billion in sea-level rise benefits to get a positive benefit-cost ratio.  Comparing these reports shows that financing the 2nd tunnel by MWD adds enormous costs for their ratepayers for little/no additional benefit.   
Serious problems with previous reports, especially the use of a deceptive no project baseline to artificially increase water supply benefits, are repeated in this report.  I have written about that extensively elsewhere and will not repeat it here.  I may amend this analysis later once I have time to review in more detail.

Monday, September 17, 2018

Should Scenario Planning for Bay Area Prosperity and Social Inclusion Include the Mega-Region?

The Bay Area urbanist think tank SPUR recently released a provocative report that lays out 4 future scenarios of the Bay Area in 2070.

Inland areas in Northern California only appear in 1 of the 4 scenarios, "Gated Utopia: Economic prosperity + Social Exclusion."  This is the first of 4 scenarios presented, and it SPUR seems to be suggesting that it is where current trends are taking us.  After a mostly positive description of life in the Bay Area in 2070, it turns to the North San Joaquin Valley.
"Outside the core of the region, it’s a different story. Service workers endure long, crowded commutes from a sprawling supercity in the northern San Joaquin Valley that encompasses the formerly separate cities of Tracy, Stockton, Manteca and Modesto. Among its neighborhoods of inexpensive single-family homes, the supercity includes a number of shantytowns and tent cities"
The most positive scenario that SPUR creates is called "A New Social Compact Economic Prosperity + Social Inclusion."  In it, Bay Area communities allow much greater housing densities, adapt to smaller living spaces, but enjoy broadly shared economic growth as the population grows beyond what anyone thought imaginable for the region.  Inland areas of Northern California are left out of this vision.

This is surprising to me, since SPUR was one of the first to write about the Northern California Megaregion concept in a 2007 report that influenced my thinking about Northern California not long after I moved to the region from the East Coast in 2008.
"Our perspective is that the megaregion approach will help create new middle-income opportunities that spread the prosperity of California to a broader range of households and communities. While the competitiveness of the coastal regions in the Northern California megaregion depends on our leading edge universities, entrepreneurs and an abundance of risk capital, the economic opportunities for the inland regions of the state will depend on building bridges to these innovative industries, particularly in manufacturing and other industries."
The 4 scenarios in the new SPUR report are designed to provoke discussion and debate, and it has. 

It's unfortunate that this new SPUR report suggests that the outcome of "economic prosperity + social inclusion" can only occur through a super-high density, urban vision with very high local taxes funding a local social inclusion agenda.  I believe there are alternative paths to the goal of economic prosperity and social inclusion that could be pursued at a larger mega-regional spatial scale, along the lines of SPUR's 2007 report. 

Monday, July 9, 2018

Three Days Before MWD's Revote On Financing the Delta Tunnels, A New Regulatory Document Further Multiplies The Investment Risk

The Metropolitan Water District re-votes on their plan to finance the majority of the $17+ Delta tunnels plan tomorrow.  Over the weekend, I reviewed the information MWD staff prepared for their vote, along with the new Sacramento-Delta report released by the State Water Board on Friday that is likely to substantially reduce the water supply benefits of the tunnels.

  1. Master Agreement for the 3,000 cfs unsubscribed capacity.  (In March, staff promised this ASAP, but still nothing 3+ months later)
  2. Legal Opinions of financing additional 3,000 cfs capacity: Prop 26/128, water rights
  3. Benefit/cost analysis of financing the additional 3,000 cfs capacity
  4. Real evidence to support staff expectation that CVP will lease back the capacity (not more talk from staff who have been wrong about farmers paying for the last 10 years)
After Friday's release by the State Board, I would add to the top of this list an analysis of how the State Board's Sacramento-Delta framework will affect water supply from the tunnels.  The Delta outflow recommendations in this new document would reduce diversions from the Sacramento/Delta watershed by an estimated 2 million acre feet per year compared to existing conditions (with or without the tunnels).  Not all of that would be the responsibility of the SWP and CVP, but the document does state "The Projects (SWP/CVP) would bear a significant portion of that responsibility since they are the largest, most junior diverters in the watershed..."

These new outflow regulations will have major impacts on this slide that has been at the heart of the MWD staff argument that WaterFix is a good investment.  

MWD staff's "Future without CA WaterFix," cuts Delta exports by 1 maf over "Existing Conditions."  This future scenario looks more likely now, and it would go a long way towards meeting the Board's proposed outflow requirement that would cut diversions by 2 maf.  On the other hand, it is pretty much impossible to see how the "Future with CA WaterFix" scenario could occur and meet the outflow requirement of the Board.  As mentioned above, the Board says "The Projects would bear a significant portion of that responsibility" but under this Future with CA WaterFix scenario, the Projects would increase diversions compared to Existing conditions and wouldn't be contributing anything.  

Thus, the new Sacramento/Delta outflow rules are likely to push the bar on the far right (water exports with the WaterFix) down, and thus will push the estimated water yield from the tunnels way down and the difference between these two bars should be much smaller.  I would argue that the EIR/EIS project yield of 0.2 maf looks like a better assumption than staff's 1.3 maf of water yield.  As the yield declines, the cost per acre foot rises rapidly and WaterFix becomes a worse investment for MWD.

The MWD board would be well advised to redirect the billions they would invest into WaterFix into alternative projects that will yield more water per dollar invested while furthering the state's goal to reduce reliance on the Delta.
Finally, I should mention the two changes in what MWD staff has provided to the board in the July 10 packet compared to the April 10 vote.  

First, the July 10 agenda does not include a single-tunnel option for the board.  Staff says this is no longer an option, pointing to a letter from a Department of Water Resources lawyer saying DWR is no longer considering a "staged" single-tunnel plan.  The MWD Board should not accept that flimsy  dismissal of the single-tunnel option.  DWR only said that because the MWD board voted to finance the 2nd tunnel on April 10.  

Should the MWD board rationally choose not to fund both tunnels now, a one-tunnel plan will be back in consideration.  For precedent, look at what Santa Clara Valley Water District did last fall - they voted to support a single-tunnel concept when there was no single-tunnel proposal - and suddenly that became the plan.  The real concern is the time pressure created by the end of Governor Brown's term.  It is probably true that the twin tunnel proposal will die if it is not approved before the end of his term, but I don't think the same can be said of the urban, single-tunnel option.  As I recall, Gavin Newsom has said that he supports the concept.  While I think no tunnel is the right answer for California, I would agree that single-tunnel is a better and less risky option for MWD than this "unsubscribed capacity" two-tunnel strategy. 

The second important change to the July 10 packet was a new estimate of the additional water supply MWD could get from the 3,000 cfs unsubcribed capacity if CVP did not lease it from them, 150,000 af.  Staff had not been clear about this before, and it seemed like some board members thought they would get 433,000 af in additional water supply if CVP didn't lease capacity (the same benefit estimated for CVP), but this extra capacity would deliver about 1/3 the water supply benefit to MWD than it would deliver to CVP.   Financing the unsubscribed capacity would increase MWD's cost for the tunnels by more than 100%, while increasing their water supply benefit by less than 20% at best (perhaps nothing at all given the state board's newly announced plan for increased outflow).

MWD staff's plan to fund 65% of the twin-tunnels is a bad deal that keeps getting worse for MWD ratepayers.  Fortunately, MWD board members have another opportunity to vote and they have plenty of good reasons to change course.

Saturday, June 30, 2018

New WaterFix Financial Plan Is Extremely Risky. Will MWD Board Reconsider Their Vote on July 10?

On April 10, Metropolitan Water District (MWD) approved, with little analysis, a hastily conceived plan that greatly increases their "Waterfix" commitment from $4.3 billion to a blank check for 65% of the project (currently estimated at $10.8 billion).  Most of the additional cost is from MWD committing to finance the project's "unsubscribed capacity," which is defined as 1/3 of the $17+ billion project.  The "unsubscribed capacity" exists because the agricultural serving Central Valley Project made a rational decision not to finance their share of the $17+ billion Waterfix tunnels, and MWD's last minute reversal is a desperate attempt to fill this financial hole and get it approved before the full risks of the plan can be understood.  While this vote commits MWD to 65%, they are also negotiating exchanges with State Water Project agricultural contractors for portions of the other 35%, so it seems probable that MWD's final share will be 75% or more.
Due to likely Brown Act violations, MWD will be revoting on the additional financing on July 10.  In a letter denying the Brown Act violation while announcing the revote, MWD argues that there was no violation because the vote must be viewed in light of the "robust discussion" around the tunnels in over 10 years of planning.  I agree with that, this last minute change to the financial plan must be viewed in light of 10 years of staff describing a completely different financial scenario; ten years of staff wrongly stating that farmers will pay for the majority of the project; ten years of staff insisting MWD's share is only 26%; ten years of staff saying there will be no farm subsidies; and ten years of staff dismissing analysis (by me and others) that correctly predicted that farmers would and could not pay their share and that MWD ratepayers or taxpayers would subsidize the project. 

In fact, most of the agenda packet for the meeting in which MWD commits an additional $6.5+ billion to the project are white papers and analysis that do not even contemplate that MWD would pay more than $4.3 billion, or how non-participation of the CVP could affect project operation.  This new deal hasn't received a fraction of the previous analysis, and it is clear that many are uninformed and confused about what this change means.  MWD staff say that CVP agricultural contractors are expected to pay them back in the future by renting the tunnel capacity from them, a plan with remarkable parallels President Trump's plan to have Mexico reimburse U.S. taxpayers for building his border wall if Congress approves up front financing

MWD board members still do not have key information they need to consider before making risky, multi-billion dollar commitment from their ratepayers.  This information includes:
  • The "Master Agreement" with DWR that describes the management of the "unsubscribed capacity."  The board wasn't even provided a draft agreement, just a powerpoint slide that lists what staff hopes will be in this critical agreement.
  • An analysis of whether the unsubscribed capacity arrangement in the master agreement will stand up to legal challenge, does not infringe on others water rights, and complies with the California constitution (notably Propositions 218 and 26).
  • An independent benefit-cost and financial analysis of the additional "unsubscribed capacity" investment, including a robust analysis of risks and unintended consequences. 
  • Since staff argue they will be repaid by CVP farmers, they should provide some evidence that this expectation is reasonable.  If they couldn't get a formal agreement, it seems there should be a minimal expectation of a letter of support from CVP that signals their intent to use and pay for this capacity.  In addition, how about a serious independent analysis that shows why it would be in CVP farmers economic interest to pay these costs.
Last weekend, I finally watched the March 27 workshop meeting where staff reviewed the unsubscribed capacity deal.  As far as I can tell, this meeting is the only information on the unsubscribed capacity deal prior to the vote, and months later, is still the best information out there.  I found the meeting alarming.  MWD staff did not adequately convey the risk of the financing scheme to the board, and made a number of questionable and misleading statements throughout the meeting.  Some of the board members (those who voted No on April 10) asked good questions, but did not receive good answers from staff.

Below are some more specific comments on this financial plan after watching the March 27 workshop. 

This deal increases the already high risk that the tunnels will never provide the additional 1.3 million acre feet (maf) of water supply reliability claimed by MWD staff.     

The 1.3 maf of water supply benefits is the result of MWD staff using an alternative no-tunnel baseline than is used in the EIR/EIS and various regulatory permits for the tunnel.  In the WaterFix permit documents, the incremental water supply benefit is just 0.2 maf, not 1.3 maf, because the no-action baseline is different.  The difference between the MWD staff estimate of 1.3 maf, and the 0.2 maf in the EIR/EIS, is that the official permit project description includes new south Delta pumping restrictions as part of the WaterFix project, whereas the staff analysis puts these new south Delta pumping restrictions into the no-tunnel baseline (and thus takes them out of the WaterFix project).

When all the SWP and CVP contractors are participating equally, this baseline argument is kind of abstract and academic although it is critical to the assessment of the benefits, costs, and environmental impacts of the tunnels.  However, it is no longer an academic debate when the CVP is out and MWD is financing "unsubscribed capacity." When all entities are participating, the touted 1.3 maf water supply benefit are the 2 projects working together to "protect" water they are currently diverting from future reductions.  But when MWD staff is using this speculative no-tunnel baseline assumption to define the additional water supply benefits they will receive for the extra investment, the additional water supply is water that goes to the CVP under current regulations.  Thus, in this unsubscribed capacity scheme, MWD staff is using this speculative future baseline to argue that financing the full WaterFix will give them control of water supply that CVP currently diverts from the south Delta.  That is a very different argument, and MWD board members should be very, very skeptical of that it will actually work that way.

Surprisingly, MWD staff patted themselves on the back for being consistent with this 1.3 maf yield assumption since way back in the BDCP days.  Stubbornly maintaining the same wrong position even as the facts change is nothing to boast about.  It was a speculative assumption under BDCP, but MWD staff stuck with the 1.3 maf water yield estimate even though shifting from BDCP to WaterFix (and losing the BDCP's section 10 ESA permit) reduced the primary rationale for this assumption.  And now the non-participation of the CVP further reduces the justification for this optimistic water supply assumption, but MWD staff is sticking with it - just like they stuck with their claim farmers would pay.  Good luck wrestling that water away from the CVP if they don't pay for the tunnels (not to mention environmental needs).

Financing "unsubscribed capacity" substantially increases project risks.  Three of the projects' biggest risks to MWD are amplified by this deal.
  • Cost overruns.
  • Farmers don't pay.
  • Future environmental regulations restrict the north delta intakes.
These have been big risks for MWD all along, but they are magnified here because this deal makes them positively correlated.  For example, if the project has construction cost overruns like most megaprojects - it greatly increases the risk that farmers will choose not to pay MWD to use the "unsubscribed capacity" because the costs will be too high.  In contrast, in the framework staff described for 10 years, all participants would have been equally on the hook for cost overruns, but the vast majority of cost overrun risk falls on MWD now.  In light of this, the MWD board should request an independent and updated cost estimate rather than rely on an old outdated, cost estimate.

As mentioned above, when the tunnels shifted from the BDCP to the WaterFix, MWD lost section 10 ESA assurances against future regulations and thus accepted much greater risk that the north Delta intakes could be restricted in the future.  That risk further increases with farmers not participating (which is more likely with cost overruns), because there will be a powerful political constituency arguing to pin future environmental problems in the Delta on the tunnels instead of the south Delta pumps where they divert.  The biological opinions and other analysis of the tunnels to date suggests that it won't be hard for the CVP to get scientific support for stronger restrictions on the north Delta instead of the south.  

MWD staff said they cared about risk reduction and wrote this principal on their powerpoint slides, but the reality is that this financial deal increases financial risk even more than the increase in their cost share.    

Staff comments about exchange contractors, wildlife refuges, and CVP ability to access the tunnels don't sound right.

In the meeting, staff argued that the CVP will not have any access to the tunnels, even if it means exchange contractors and wildlife refuges would receive diminished water supply.  I am pretty sure there are some lawyers with differing opinions on that one.  My first thought was to wonder if staffs claims about the effects of non-participation in WaterFix on CVP is consistent with this recent settlement between Friant and DWR.  If I were a MWD board member, I would be asking for an independent legal opinion on these issues.  

MWD staff is wrong that this financing approach maintains consistency with the approved project.

Maintaining consistency with the project that has received some permits (and is still under consideration for others) was touted as a major advantage to MWD financing the full 2-tunnel, 3-intake project rather than scaling down to a single-tunnel, "phased" approach.  While this keeps the physical infrastructure the same as in the permits, I am told that implementing the proposed "master agreement" in the way MWD staff describes would create big changes in operations (including upstream reservoirs, the south Delta intakes, and the distribution of export water south of the Delta).  Thus, it will result in big changes to the environmental and water supply impacts of the project, and could easily add permitting delays that are comparable to the single-tunnel approach.

Staff is wrong that farmers will repay them, and that the farmers need them to finance the "unsubscribed capacity" because of cash flow.  

Staff is right that this is a better deal for CVP farmers, but it is not for the reasons they say.  CVP farmers benefit from MWD financing the "unsubscribed capacity" deal because it a) shifts the risk of cost overruns and other problems from them to MWD, b) gives them a decade or two to find ways to shift their cost share onto someone else, and c) allows them to pass on the deal all together if it isn't beneficial to them (which it will not be unless a subsidy materializes).

With the cash flow during construction argument, MWD staff is just making something up that sounds plausible, but it is less credible than a pitch from a used car salesmen.  Westlands and CVP contractors can do the same thing while financing their share themselves by capitalizing some or all of the interest on the bonds.  Goldman Sachs described these options in their presentation to Westlands using a cash flow argument, and it is a common argument/structure for infrastructure bonds.  MWD staff claims that they would be repaid by farmers for fronting the money, including all the accumulated interest, which is no different to the CVP than financing it directly with capitalized interest.

Of course, staff also mentioned that the Sustainable Groundwater Management Act (SGMA) will make this water more valuable to farmers in the future.  They are right about that one.  The primary substitute for surface water is pumping groundwater, so SGMA will reduce access to that substitute and will increase the value of water.  I have seen estimates that it could drive willingness to pay up to $500 or $600 per acre foot.  There are some limits to high how it can go, as there are still other alternatives to get water than paying for the tunnels.  Lower cost options could include lobbyists, lawyers and campaign contributions, and the most costly options are to let the land growing less profitable crops go fallow, or go buy a farm somewhere else.  Even those high-cost options are likely to be cheaper than spending billions on tunnels for meager water supply improvement.

MWD staff made a terrible comparison between MWD's investment in the unsubcribed capacity to a private investor in a private/public partnership.

This analogy begs the question of why aren't private investors financing the unsubscribed capacity instead of MWD?  Unlike private investors in a public-private partnership, water agency staff (and boards) are risking other people's money, not their own.  Private investors would never touch this deal, and neither should MWD.

MWD staff blames the Bureau of Reclamation, but this financial mess is their own fault.

These financial issues were entirely predictable, and in fact were predicted 6 years ago.  MWD staff acts like the Bureau of Reclamation surprised them with an unexpected change.  Really?  No one ever seriously believed exchange contractors and wildlife refuges would pay because they don't benefit, and the CVP contractor with the most potential gain, Westlands, have been in doubt since the beginning and had their planning costs subsidized. 

This mess of a financial plan is a direct result of the Department of Water Resources (in alignment with MWD staff and state water contractors) to ignore their own guidelines about about feasibility studies and cost-benefit analysis, and their push back against every attempt to require an independent analysis of financial feasibility, and economic benefits and costs.  I can recall sitting in multiple Assembly hearings in recent years while MWD staff argued against bills that would have required the state to follow its own guidelines on financial feasibility and benefit-cost studies.  Rather than fighting against independent financial analysis along the way, MWD staff should have supported proper financial and economic analysis.  Then they could have been developing and analyzing the feasibility of alternative financing approaches years ago, not coming to their board with half-baked financial schemes at the last minute.

I am sure others have many more questions to add to mine.  Hopefully, MWD staff will take advantage of the additional time to fill-in the numerous critical information voids and provide their board with adequate information and analysis to make a commitment of this magnitude.  I am not expecting that, but maybe some MWD board members will use the opportunity to get more information and reconsider their vote.

Friday, June 15, 2018

New Data Shows California Farm Employment Decreased Slightly in 2017, First Decline Since 2009

New data from the Quarterly Census of Employment and Wages (QCEW, shown below) shows total farm employment in California declined 0.5% between 2017 and 2016.  This breaks a streak of seven straight annual increases, which to the surprise of many, persisted through the worst drought in California's modern history.  Interestingly, the decline was entirely due to a sharp 4% year-year drop in the months of January and February 2017, farm employment was unchanged over the rest of the year.  Since these two negative months correspond to President Trump's inauguration, and are also in the low season, increased anxiety surrounding immigration policy may have had an impact.

Average wages paid increased 3.1%, enough to keep pace with inflation, but about half the percentage increase seen in 2015 and 2016 and the smallest gain since 2011.  An increase in the minimum wage from $8 to $10 per hour contributed to higher 2015 and 2016 wage increases, as 2017 brought a smaller 50 cent increase to the minimum wage that only applied to employers with at least 26 employees. 

Farmers are having an increasingly difficult time getting all the workers they demand as immigration has decreased and unemployment in California's farming regions have dropped to record lows.  While farm worker wages have increased somewhat faster than overall average wages, it is still the lowest paying industry in California by far, and farm worker wages have not increased as much as one might expect in response to the combination of reported shortages and the rising minimum wages.  Nevertheless, the farm labor situation is causing more change to California agriculture than water scarcity, as farmers across the state are adjusting crop choices, and exploring and implementing new labor saving technology.

Changing policies are likely to accelerate the pace of this in the coming years.  Between 2019 and 2022, California's minimum wage will rise from $12 to $15 per hour.  Over the same period, the state will phase in new overtime rules that will bring agriculture into alignment with rules governing other industries.  In addition, these increased labor costs will hit at a time that the new federal tax law increases incentives for business capital investment.

Thus, big changes are coming to agriculture labor markets and this data will be very interesting to track over the next 5 years.  While it will be a challenging time for farmers, I am optimistic that the Valley economy will benefit in the long-run from the transition of the industry to a more capital and technology intensive production with higher wages, even if it ultimately means fewer jobs.

Year Crop farm Anim Farm Ag Services Total % change
2007            172,222              29,955            180,454              382,631
2008            174,697              30,283            183,405              388,385 1.5%
2009            170,041              29,157            171,453              370,651 -4.6%
2010            170,068              28,299            181,386              379,753 2.5%
2011            170,333              29,140            186,546              386,019 1.7%
2012            171,501              28,987            195,225              395,713 2.5%
2013            174,776              28,266            205,552              408,594 3.3%
2014            175,127              28,140            209,131              412,398 0.9%
2015            176,537              28,496            213,178              418,211 1.4%
2016            172,847              28,476            219,839              421,162 0.7%
2017            169,252              28,672            221,155              419,079 -0.5%
Total Wages (in thousands)
Year Crop farm Anim Farm Ag Services Total % change
2007  $     4,416,340  $        848,165  $     3,680,430  $       8,944,935
2008  $     4,567,919  $        898,979  $     3,841,685  $       9,308,583 4.1%
2009  $     4,452,149  $        877,571  $     3,661,821  $       8,991,541 -3.4%
2010  $     4,526,888  $        860,390  $     3,973,411  $       9,360,689 4.1%
2011  $     4,667,911  $        905,600  $     4,237,943  $       9,811,454 4.8%
2012  $     4,931,875  $        913,074  $     4,634,998  $     10,479,947 6.8%
2013  $     5,274,135  $        913,979  $     5,087,808  $     11,275,922 7.6%
2014  $     5,483,877  $        950,215  $     5,359,878  $     11,793,970 4.6%
2015  $     5,734,489  $     1,021,973  $     5,856,656  $     12,613,118 6.9%
2016  $     5,947,906  $     1,064,181  $     6,541,821  $     13,553,908 7.5%
2017  $     6,024,487  $     1,119,909  $     6,757,423  $     13,901,819 2.6%
Average Wage
Year Crop farm Anim Farm Ag Services Total % change Min wage
2007  $          25,643  $          28,315  $          20,395  $            23,377 $7.50
2008  $          26,148  $          29,686  $          20,946  $            23,967 2.5% $8.00
2009  $          26,183  $          30,098  $          21,358  $            24,259 1.2% $8.00
2010  $          26,618  $          30,404  $          21,906  $            24,649 1.6% $8.00
2011  $          27,405  $          31,078  $          22,718  $            25,417 3.1% $8.00
2012  $          28,757  $          31,499  $          23,742  $            26,484 4.2% $8.00
2013  $          30,177  $          32,335  $          24,752  $            27,597 4.2% $8.00
2014  $          31,314  $          33,767  $          25,629  $            28,599 3.6% $8.50 (July 1 increase to $9)
2015  $          32,483  $          35,864  $          27,473  $            30,160 5.5% $9.00
2016  $          34,411  $          37,371  $          29,757  $            32,182 6.7% $10.00
2017  $          35,595  $          39,059  $          30,555  $            33,172 3.1% $10.50 (>25 employees), $10 (<26 font="">

Notes:  Employment is the average of monthly payroll employment over the year, and the average wage is just the total wages paid over the course of the year divided by the average number of jobs.  Data on hours worked or the hourly wage are not available from the QCEW.  The QCEW is a census of all employer tax filings and is considered the most reliable data on payroll jobs and wages.  The data includes NAICS codes 111 (crop farms), 112 (animal farms), and 115 (support services which includes a small amount of non-farm jobs but is dominated by farm labor contractors).  

Monday, June 11, 2018

Another small step towards a creative downtown Stockton

Mike Fitzgerald's weekend column profiled a group of young San Francisco transplants starting up a "maker space" in downtown Stockton.   While this is a slow developing movement, I still think encouraging more of this is one of the best economic development strategy for Stockton.   Nearly two years ago, I wrote this in another post,
Everybody is so impressed with Silicon Valley that far-fetched hopes for the tech industry often dominate economic development talk.  But the best assets of Stockton, proximity to Bay Area markets with relatively low real estate costs, are not that important to tech industries who aren't sensitive to rents and sell to a global market.  The tech industry has moved up the peninsula to even more expensive San Francisco.  Much of the attraction is the art and cultural attractions of the City, and there is much concern in SF that the tech workers are damaging the City's cultural fabric as they drive rents into the stratosphere.

I have long thought Stockton should focus its economic development on artists (broadly defined to include craftspeople, musicians, etc.), since they are more likely to be attracted to what the city has to offer.  They are sensitive to rents, and value access to the Bay Area market but do not necessarily have to live and work there every day.  Stockton's history, diversity, and urban environment can also be a plus.