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.